SUSTAINABILITY
THE SUSTAINABILITY LANDSCAPE
Investors increasingly want their capital to have a positive impact on the people and the planet, as well as delivering on their financial goals. Square Mile Research looks at how advisers can approach Responsible investment with their clients. The green revolution is underway. It is impossible to ignore the demands for action on climate change from popular pressure groups, and the ever more ambitious targets for achieving net zero carbon emissions being published by governments worldwide. At the same time, companies’ supply chains are being scrutinised for any evidence of malpractice, while movements such as Black Lives Matter underline social injustices and the need for a more equitable world. These calls for responsible capitalism are echoed across the asset management industry. Until recently, the primary focus for many investors was to ensure that the return on their investments met their financial goals. Today, of equal importance for many is the desire for their money to have a positive impact on both the planet and wider society. It is now clear those two goals are not mutually exclusive, and those businesses which are on the wrong side of the transition to a better world may well struggle as ESG and Responsible investment become increasingly adopted by fund managers across the industry. Navigating this new landscape of Responsible investment may appear challenging; however, it presents a significant opportunity for advisers. Research conducted by Square Mile earlier this year, found that 41.7% of advisers surveyed indicated that over half of their new clients will seek to invest in responsible or sustainable strategies within the next three years. However, it’s not only investors and asset managers driving this change, but the regulator has also turned its focus to Responsible investment. Although the UK is no longer obliged to adhere to the EU’s MiFID regulations, which require European advisers to ascertain and account for their clients’ sustainability preferences; the Treasury has opened a review of the EU’s ‘green regulations’. This
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is with a view to preparing recommendations to introduce a comparable regime in the UK. While there are currently no firm timescales as to when any regulatory changes will be implemented or an indication to their extent, the direction of travel remains apparent. Therefore, it would be prudent for advisers to start preparing their business to understand and interpret their clients’ preferences towards Responsible investment. Furthermore, this extends to ensuring they have provisions for these preferences within their Centralised Investment Propositions (CIP). A fundamental first step is to address any confusion surrounding the terminology used, as this will provide a solid foundation to build upon with clients. Historically, ‘ESG’ and ‘Responsible investment’ have been used interchangeably; however, there is an important distinction between the two. ESG should be viewed as an input into the investment process; a lens that a fund manager can use to determine the level of attraction of a stock and as a means of mitigating risk. It can also provide an indication of how a company’s ESG credentials might act as a tail or headwind to its future success. Responsible investment, on the other hand, is an umbrella term that captures the spectrum of differing investment approaches which focus on using investment as a force for positive change. Commonly referred to as the Spectrum of Capital, these approaches range from those that exclude certain securities or sectors, to those that focus on delivering positive and measurable impact to both society and the environment. At Square Mile, we believe there are four broad categories which stem from Responsible investment, outlined below:
