Who is this article for?
Advisers who want to check their understanding of responsible investing.
Responsible investment is the focus of global financial services regulators and governments
In the last twenty years or so, ESG related regulation across the world has accelerated at a rapid pace and there is no sign of let-up. Governments around the world are waking up to the pressing need to address the connection between investment and the impact (either positive or negative) on global issues such as climate change. This is driving policy change towards encouraging responsible investment.
International initiatives include global targets and agreements, such as COP21 and COP26. Plus with the election of Joe Biden as US president, America has already altered its response to climate change by re-entering the Paris Climate Agreement.
Developments in regulatory compliance
The EU is very much seen as the forerunner in developing responsible investment regulation and has been the first jurisdiction to implement responsible investment related disclosure rules. Other governments and regulators, including the UK’s, are developing similar regimes.
The UK’s financial services regulators, the Financial Conduct Authority and Prudential Regulation Authority, are progressing requirements for listed companies and financial service provider firms around the transparency of both their company practices and the products they sell to customers.
From 2022, for example, the Financial Conduct Authority will require all premium listed companies on the London Stock Exchange, such as Quilter, to include a statement in our annual financial report saying whether we’ve made disclosures consistent with the recommendations of the global standard-setter, the Taskforce on Climate-related Financial Disclosures (TCFD).
The adoption of TCFD standards by investable companies should in turn help improve investment decisions being made by fund and investment managers on the basis of the more consistently presented information available to them. The FCA have consulted on extending the requirements for TCFD disclosures to non-premium listed firms, as well as asset managers, insurers and FCA-regulated pension providers.
In turn, this should lead to better transparency of the extent to which ESG considerations have been taken account of within funds and investment portfolios, thus enabling advisers to more accurately meet their clients’ ESG preferences.
As well as aligning with TCFD standards, the UK’s proposals will match the ambitions of the principles of the existing EU regulations, such as:
- The Taxonomy Regulation, which defines which economic activities are considered “green”;
- The Sustainable Finance Disclosure Regulations, which are designed to demonstrate to investors visually the extent to which a product or portfolio contributes to those “green” economic activities set out in the Taxonomy; and
- Various amendments to existing standards, such as the Markets in Financial Instruments Directive (MiFID) and Insurance Distribution Directive, to better absorb ESG considerations into areas such as suitability assessments and product design and distribution. These changes are also designed to ensure that the inclusion of ESG factors in to advisory and portfolio management processes does not lead to mis-selling, such as:
- Churning of clients’ portfolios; or
- Misrepresentation of products or strategies as fulfilling ESG preferences when they do not (known as “greenwashing”).
Quilter is committed to responsible investment
It’s time to change the way we invest. More and more, investors are aware of the impact that their decisions can have on our society and environment, and are looking for more than just a financial return on their investments. As a result, they now want more control over how their beliefs are represented through their investments.