One of the prevailing themes at COP26 will undoubtedly be how society – and organisations and individuals – can make a meaningful difference. Asset managers and investment firms will already be asking themselves what more they can, or need to, do.
For some, an early taste of what ‘meaningful’ action might mean (and the results of a failure to take it) came in September when the Financial Reporting Council (FRC) announced a third of the 189 applicants who wanted to be signatories to its updated UK Stewardship Code had failed to make the grade.
The code, which sets out 12 principles for asset owners and managers, is a voluntary standard that requires firms to operate at a higher level than UK regulatory requirements when it comes to integrating ESG factors into “their investment decision-making, reporting on asset classes other than listed equity and identifying the outcomes of their efforts”.
The key issue seems not to be one of error or a lack of effort, but instead one of reportage. The code states “signatories may choose to use their report to meet the requirements of the Code and disclose information to meet other stewardship-related UK regulatory requirements or international stewardship codes”, which seems to have caught out several firms. In some cases, the reports submitted read too much like “policy statements”, according to the FRC, without addressing the “principles”, or groups were not able to “sufficiently evidence” their approach.
The FRC’s report is perhaps the latest example of the industry recognising that a ‘marking your own homework’ approach is no longer sufficient, particularly when it comes to ESG investing. Earlier this summer the Financial Conduct Authority metaphorically rapped the knuckles of several investment firms for falling short on assessing the value provided by their funds in their annual Assessment of Value reports and there is always an inherent risk of style favouring substance when such publications are not held up to robust scrutiny.
Greater clarity needed
However, although many might be hard pressed to feel sorry for fund groups when they are criticised for trying to put a good spin on things with little hard evidence, in the context of ESG reporting and regulation, greater clarity is needed.
Where the term ‘ESG’ alone contains a myriad of investment styles, approaches and outlooks – which are sometimes contradictory to one another – it is no wonder many fund groups have resorted to publishing their ambitions rather than their achievements.
We have in recent years seen a number of attempts to provide this clarity at both national and international level. This includes the Sustainable Finance Disclosure Regulation, which seeks to determine what constitutes an ‘ESG’ fund and the European Taxonomy for Sustainable Activities, which looks at the terminology used to define sustainable activities. Moving forward, there is little doubt there will be clear standards in black and white, so investors know where they stand and box-ticking will no longer be acceptable.
That is not to say of course that great strides have not already been taken. The FRC was quick to point out that while some were turned down, 90 asset managers and 23 asset owners were successful and it even cited “some strong reporting” on underpinning governance activities. And those who failed at the first hurdle were invited to reapply at the next review in October or next April, with the benefit of knowing what they need to do to make the grade.
With a greater focus on identifying areas for improvement and the discourse surrounding COP26, hopefully the industry can begin to address these outstanding issues by the time COP27 comes around, if not before.
Mikkel Bates is regulations manager at FE fundinfo and an ESG Clarity editorial panellist.
