Socially responsible investment moves up the regulatory agenda

Socially responsible investment moves up

Investment managers have a key role to play in helping to encourage investing institutions in the right direction.

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Previously a subject left to industry good practice and investor demands, socially responsible investment (SRI) is beginning to move up the regulatory agenda. We predicted in the Evolving Investment Management Regulation 2016 report that as a result of the new legally-binding treaty on climate action agreed in Paris nearly a year ago, policy makers are turning their attention to how they can encourage or require investors and investment managers to adopt strategies that will support countries in meeting their new commitments. In Europe, legislators are now discussing the need for new rules to mandate disclosures and to develop common definitions and standards.

The new treaty contains emission reduction commitments from 187 countries starting in 2020. The countries have made commitments to reduce greenhouse gas emissions and to manage the impacts of climate change. French law has already been modified to require more specific disclosure in the management report of French entities, including investment funds, on the resources put in place to contribute to environmental improvements. The investment manager must consider the assets in which it invests its clients and their impact on the environment. The new rules are applicable from the end of this year.

Discussions are now taking place at European level. ESMA is considering how the provision in the new Key Information Document relating to an investment product’s environmental objective might ensure proper transparency. And MEPs across the political spectrum are seeking the industry’s views about what more needs to be done at legislative level.

Initial thoughts emerging include the need for clarity on what is and what is not SRI, convergence of accounting and reporting requirements, and standardisation of the identification and calculation of investment risk. Concerns have also been expressed that regulatory and tax initiatives need to be better aligned, both with each other and with a long-term investment view.

Meanwhile, investing institutions are increasingly incorporating green investments into their portfolios. A long-term investing horizon is essential for retirement savings, for example, and is also a prerequisite for sustainable investment. But there also need to be more SRI investment opportunities. These might be new investments or existing investments that are brought into compliance with SRI requirements.

Investment managers have a key role to play in helping to encourage investing institutions in the right direction via their communications and the investment strategies they offer. This may require firms to adjust their investment and operational processes. KPMG, in association with the United Nations Global Compact publishes a Sustainable Development Goals Industry Matrix, which provides examples and relevant information on Sustainable Stock Exchanges.

The debate is not only European, but global. The Canadian regulators have been exploring an explicit best interest standard for advisers and dealers. In Thailand, the regulator and industry have jointly been working on an Institutional Investor Code for promoting responsible investment. KPMG is also involved with the Financial Stability Board’s Climate Disclosure Taskforce and the Green Finance Initiative.

Hitherto, firms have been encouraged by investors, by regulators or by governments to adhere to recognised Principles for Responsible Investment. The tide is now turning. Firms can expect to see a steady move from industry good practice to rules, and from general regulatory guidelines to law. Now is the time for investment managers to engage in the European and global debates, to have a regular dialogue with their clients on SRI issues, and to evolve their investment strategies and product options for a world in which SRI becomes the norm not a nice to have extra.

Critical questions for firms to address:

  1. How well and how regularly are we engaging with our institutional clients on SRI issues?
  2. Are we explaining SRI-compliant products clearly and effectively to retail investors?
  3. How embedded in our investment offerings and processes is SRI investing?
  4. Do we need to review our current investment and operational processes?
  5. Can we bring existing products and strategies into compliance with recognized SRI principles?
  6. Are we engaging with regulators and legislators as they consider new rules?

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