Insights

ESG policy outlook – where are we now?

14/06/2024
4 min read

Introduction

Aurum Funds Limited hosted their second Alternative ESG Symposium in May 2024, aimed at driving forward positive, sustainable change across the industry. The symposium gathered subject matter experts and industry representatives to collaborate and share insights across a wide range of disciplines. In order to share these discussions with a wider audience, the content from the panel sessions has been collated into a series of short articles, covering the key ideas and potential benefits to the alternative investment industry.

This first part of the series covers the session – “An ESG Policy outlook” – which discusses the current status of policy and aspirations for the future.

ESG event panel discussion about environmental social governance policy

Pictured L-R: Emily Forsyth-Davies, Adam Jacobs-Dean, Lylah Davies, Rita Hunter and Ian Trim

Current ESG policy situation

ESG policy continues to be disjointed, especially in the UK when compared to the EU and the US. Although, an encouraging UK policy has been the mandate for Task Force on Climate-Related Financial Disclosures (“TCFD”) by large companies and pension schemes and this has driven a vast array of innovation in the climate space. However, there continues to be uncertainty around the UK Green Taxonomy and the ongoing flip-flopping on policy – for example the delay in banning sales of petrol and diesel cars from 2030 to 2035.

ESG policy continues to be disjointed, especially in the UK when compared to the EU and the US.

More generally, there continues to be a focus on producing reporting, rather than evaluation of how this reporting is used. Very few companies are examining whether the reporting and provided information is fit for purpose for external stakeholders. There is also a need for more focus on actions and outcomes, rather than reporting, and for companies and asset managers to be measured on their impact as well as their data and transparency.

Impact on market competitiveness for asset managers

ESG event panel discussion about environmental social governance policy Ian Trim director Guidehouse speaking

Pictured L-R: Lylah Davies, Rita Hunter and Ian Trim

Depending on the aims of companies and asset managers, ambiguous policies can affect market competitiveness. Asset managers operate globally, and raise money across different countries and regions. They have to navigate different requirements and demands from different jurisdictions. Without consistency in policy it’s hard to make future plans and allocate resources. Consequently, some asset managers are considering relocating to regions with clearer policy aims and regulations and where these can be more easily adapted to local needs.

There is also a trend for some asset managers to embrace evolving policy and best practices globally to stay ahead of the curve and continue to have a global appeal to investors. This has most recently been seen with those who are early adopters of new standards such as The Taskforce on Nature-related Financial Disclosures.

There can be significant competitive advantages for asset managers that are early adopters of globally recognised standards and for those based in more forward-thinking jurisdictions with clearer policy aims.

Regulatory challenges and opportunities

Given the disparate regulatory regimes globally, there are many navigation challenges. These include market competitiveness, as discussed above, but also regarding issues around regulatory enforcement. What is required in one country can be problematic for laws and regulations in another country. The most obvious example of this is the bifurcation between the approach in the UK and the US, in the US where there is differing legislation at the state-level. Some of this state-level legislation prohibits investment in managers with decarbonisation plans or where those that operate exclusions around fossil fuels. This is in direct contrast to the UK where the Task Force on Climate-related Financial Disclosures reporting is mandatory for all asset managers with more than £5bn in assets under management and is seen as a key step to decarbonisation. This means it can be complicated to ensure the correct processes are followed, so a huge amount of resources needs to be directed into ensuring correct regulatory positioning amongst divergent regulatory requirements.

To improve this going forward, more harmonisation and robust guidance is required to help businesses operate smoothly across jurisdictions – as well as avoiding regulatory arbitrage, which we saw in the UK around Brexit. This could be supported by global frameworks to support market competitiveness and sustainability.

Risk of political change

2024 will see more voters head to the polls around the world than ever before. In total, these national elections are being held in more than 64 countries, covering about half of the world’s population.[1] The results of these elections will, for many, prove consequential for years to come.

There are concerns about the potential impacts of upcoming elections on the future direction of ESG policy. This is especially true in relation to the anti-ESG sentiment in the US, and the view that a Trump electoral victory could trigger more anti-ESG sentiment. This concern emphasises the need for consistent long-term policy decisions backed by multipartisan support.

Given that the political landscape has the ability to cause short-term disruptions, a focused long-term plan on how to approach environmental policies including climate, water and biodiversity remains critical.

International harmonisation and collaboration

Disjointed approaches to ESG policy globally mean that international companies can have significantly different reporting requirements depending on the jurisdictions they are operating in.

The systemic problems these policies are aiming to address are global issues. So having a wide range of additional reporting obligations and requirements for the same purposes is unlikely to lead to better outcomes for countries and the planet as a whole.

Focus on enhancing co-operation, both domestically and internationally, will ensure environmental challenges are addressed holistically. Without taking a unified approach to environmental issues by integrating health, climate, and economic perspectives into long-term policy, it will not be possible to provide businesses with the stability needed to adapt.

The key is to ensure that broader environmental policies, including climate, biodiversity and water, are considered, negotiated and implemented with a consistent global approach over the long term. This will help to bridge the gap between short-term financial returns and long-term environmental challenges, while giving companies the ability to plan their R&D and capital expenditure, whilst reducing unhelpful surprises.

Participants

Ian Trim
Director
Guidehouse
Panellist

Adam Jacobs-Dean
Managing Director, Head of Markets, Governance and Innovation
The Alternative Investment Management Association
Panellist

Rita Hunter
Financial Services Regulatory Partner and Co-Head of Sustainable Finance and Investment
Hogan Lovells
Panellist

Lylah Davies
Policy Analyst
OECD
Panelist

Emily Forsyth-Davies
Head of ESG
Aurum Research Limited
Moderator

  1. https://time.com/6550920/world-elections-2024/

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