Asset Management and Investment FundsNovember 16, 2021

'Greenwashing’, and new regulatory requirements and references to ESG – e.g. at EU level are continually developing. What are your overall observations on the trends that the asset management industry must address most urgently for the coming twelve month

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The dramatic move to implementation of ESG policies, and the growth of “green” funds in the past 18 months, has been driven not just by legislation, but, rapidly, by investor appetite. A Bloomberg Opinion piece dated 29 October 2021 summed up the asset management position succinctly with the title “Fund Managers Live on Earth Too, and Seem to Like It”.

COP 26 is generating much discussion on how the asset management industry and capital markets are pivoting towards green investment driven by investor sentiment and shareholder activity. At the end of the second day of the conference, more than 450 financial institutions in 45 countries signed up to a coordinated pledge to a key goal in limiting greenhouse gas emissions that will incorporate carbon emissions into their investment decisions.

The European Commission launched its Sustainable Finance Action Plan in March 2018. Legislation saw the requirement for funds to self-designate, from March 2021, as Article 6 (being funds not integrating any kind of sustainability into the investment process); Article 8 (being “light green” funds promoting environmental and social characteristics); or Article 9 (being “dark green” funds targeting sustainable investments). March 2021 saw the vast majority of in-scope funds choosing to adopt an Article 6 designation, motivated in part by a need to avoid accusations of greenwashing, and in part by lack of reliable data available to meet Article 8 and Article 9 reporting requirements.

The EU rules around ESG implementation for funds have slowly been clarified, and this, together with the rapid increase in investor appetite for green investments, has precipitated a large number of funds previously designated as Article 6 preparing to convert to an Article 8 designation.

The former governor of the Bank of England, Mark Carney, speaking as part of the second finance session at COP 26, stated that the finance industry needs to introduce rigorous climate stress testing, and the introduction of frameworks to handle stranded assets responsibly. European funds, and in particular those designated as Article 8 and Article 9 funds, will for the time being be focused on implementing the existing and forthcoming ESG legislative framework requiring them to integrate sustainability risks into their investment decision processes, organisational structure and risk management systems and to provide periodic investor reporting in a form prescribed by the European Supervisory Authorities’ regulatory technical standards.

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