Asset managers demand clearer sustainable investing definitions
Investment heads feel that ESG is no longer separate from investment, but want a less complicated regulatory environment
Asset management heads want clearer definitions for sustainable investing and favour flexible regulations that won’t stifle innovation to meet the pace of change.
For the finance industry to effectively support the transition to a more sustainable world, regulators must aim to simplify rulesets and sustainable development goals to limit misinterpretation and lessen confusion, suggest sources. Speaking at the Securities Industry and Financial Markets Authority’s (Sifma) annual meeting, Suni Harford, president of UBS Asset Management, said that regulators should aim for fewer, clearer rules.
“There are 17 UN Sustainable Development Goals (SDGs) — 17 — and each means different things to different people,” she said. “There were another 550 rules and regulations published in the sustainable investing space in 2020 alone. That's a lot to keep track of.”
These rules, goals, and climate commitments have led to divergent interpretations.
International efforts are being made to harmonize thinking on some of these issues, such as through the Glasgow Financial Alliance for Net Zero (GFanz), an umbrella group reporting to the G20 that oversees the net zero alliances in each part of the financial industry, including the Net Zero Asset Managers’ Initiative. In a more concerted way, the EU’s International Platform on Sustainable Finance is bringing regulators and policymakers together to compare notes, learn from each other and begin to iron out differences. But there is a long way to go.
See also: International cooperation needed to enact Biden’s climate push
When UBS announced its offices would be going paperless and that employees needed to bring their own mugs and bowls to the office, many thought it was a climate-responsible decision and good for the environment. However, for Harford the lesson was that for every employee email she received that praised the decision, there was another blasting the move.
“It's all in the interpretation because what's sustainable to one person is not necessarily sustainable to the next,” she said.
Threading the needle
Regulators wanting to tackle climate change through climate finance must apply strict rules and limit divergent interpretations, while also allowing flexibility, so as not to block innovation.
“We surely need regulation, but it must be flexible enough to keep up with the pace of change,” said Harford. “We must be very careful about drawing too fine a point on the definition of what is and what is not sustainable today, or else we might stifle much needed innovation tomorrow.”
See also: ESG retirement proposal pushes Biden’s climate plans
At the COP26 event this week, the International Financial Reporting Standards Foundation (IFRS) launched the new International Sustainability Standards Board (ISSB) which will establish a shared set of sustainable disclosures across six continents.
Regulators across borders, in Asia, the EU, and US, are shaping the future for sustainable investment definitions as the investments draw increased flows.
“It is worrying when we focus so much time and attention on a specific taxonomy,” Harford said.
“Beyond the fact that we have little hope of taxonomy alignment across various countries or regions, is it really just Article 8 or 9 funds that mobilise capital to a lower carbon world?”
See also: Financial institutions grapple with ESG taxonomy data challenges
With different definitions and interpretations based on each letter in environmental, social, and governance (ESG) there are always a multitude of questions about what is required, said Walt Bettinger, Charles Schwab’s CEO.
“There is so much there in the ESG world that needs to be worked out, further complicated by the fact that I haven't yet met two people who define ESG the same way,” he said. “Working our way toward definitions — they'll never be precise — but it would help to ringfence how we're going to define the ‘E,’ the ‘S,’ and the ‘G’ so that investors can make informed decisions.”
Marty Flanagan, Invesco CEO and US president, agreed that with definitions continuing to emerge from all angles, “everybody has a different point of view on it”.
“The fundamental fact is that it is here to stay,” he added.
While Harford favours flexibility, she also pushed back somewhat on asset managers, financial industry firms and the private sector leading the drive towards clear sustainability standards.
“Our place [is not] to impose our values on our clients,” she said. “Our paramount obligation and our fiduciary duty must be to deliver to our clients and to ensure that they understand how we do it and have full transparency around our performance.”
Securities and Exchange Commission (SEC) chair Gary Gensler also spoke to Sifma members, addressing climate finance as the COP 26 United Nations Climate Conference (UNCCC) convened. He said he would consider phased-in climate disclosure rules that allow companies and markets to adapt.
Gensler, a former chairman of the Commodity Futures Trade Commission (CFTC), was responsible for bringing forward several new mandates as head of that agency and has made climate risk disclosure a focus for the agency, directing staff to propose rules for climate risk disclosure rules for companies, earlier this year.
See also: US regulatory agenda to address private funds and ESG growth
Asset managers have taken different approaches to sustainable investing. Some firms have included sustainability in every aspect, others less so.
Invesco has included ESG analysis and factors across asset classes in a fulsome embrace for sustainable investing, including fixed income and real estate.
“In a few years, we're not going to talk about ESG as something separate from investing,” said Flanagan. “We're well down the path of integrating ESG into all of our capabilities.”
The level of inclusion will vary on geography, with European countries further along than the US and Asia, Flanagan said.
“It's not a marketing gimmick,” Flanagan added. “It's something that is fundamental to investing. It's going to be something we're going to be constantly talking about advancing.”
For Schwab CEO Bettinger, sustainable investment is more of a personal choice for individuals and institutions. ESG is but one of many factors to weigh when considering investment choices, he explained
“Personalisation is coming, and ESG is a component of that,” Bettinger said. “Arguably it's another step toward personalisation.”