By Simon Howard
The UK market for sustainable fund management has become buoyant across a wide range of activities. Estimates of retail AUM from EIRIS and the Investment Association both suggest growth of more than 10% over the past 12 months; the ‘green bond’ market is strengthening and shows responsible investment spreading beyond equities; and the relevance of climate change to the largest institutions was confirmed by the recent speech by the Governor of the Bank of England.
Why now? What is driving these developments?
I would cite three causes: the growing intellectual acceptance of climate change and its likely impact on asset values; changes in UK pension fund regulation; and shifting public opinion – which is backed up by some fascinating recent data.
Changing climate
It’s odd that the intellectual case on climate needs comment, but it does. After all if an investment bank or consultant said there was a 95% likelihood of something happening in the market, owners and fund managers would react. Climate change is at least that likely and I have struggled to understand why it hasn’t been driving thinking. But at last things are changing. Not only has Mark Carney given some views, but professional bodies like the actuaries are running workshops about climate change and the Financial Times has begun to cover the issue regularly. A few years ago the phrase “stranded assets” struck no chord with many fund managers, now it no longer needs explanation as an increasing number of fund houses and individual professionals begin to accept there is an issue. This is a fundamental change, and whilst attention is now focused on climate, it will in time move to other issues such as pollution and consumption of non-renewable resources.
Clearer regulation
This intellectual change comes as we await the outcome of a government consultation on how to implement the recommendations of the Law Commission’s inquiry into fiduciary duty. As a reminder, the Law Commission said “trustees should (those are the Law Commission’s italics not mine) take into account financially material factors”. As the Bank of England Governor evidenced in his recent speech, climate change is of course such a “financially material” issue, with nearly a third of equity and fixed income assets potentially affected by it. COP21 in Paris will highlight the materiality of the issue when plans for decarbonising the economy are discussed.
Assuming the UK government adequately reflects the Law Commission’s findings in the Occupational Pension Scheme Regulations, integrating climate change considerations (which is already occurring in practice) will get regulatory backing in DB pensions and can be expected to spread further.
‘Make our money count’
The third driver behind the spreading and maturing of sustainable investment is public opinion, and what people – especially young people – want from their savings and investments.
Each year my organisation UKSIF runs Good Money Week and this year both we and Standard Life ran some opinion polling to assess the difference in attitudes between young and old on this. Standard Life asked whether people wanted to invest money in companies which achieve positive social outcomes. Only 27% of those over 55 agreed, but more than 58% of those aged 18-24 did so. The thinking applied to the perception of fundamentals too: 44% of 18-24 year olds thought companies that follow sustainable business practices are more profitable or competitive than those that don’t, whilst only 22% of the over 55s agreed.
In terms of the general issues of concern, the UKSIF polling showed corruption and tax to be the two top concerns. In third place was data protection, a concern obviously timely in the light of TalkTalk’s problems and one recently covered in a report by Edentree Investment Management.
The views of the end customer should be of interest to everyone in the investment chain. We need a licence to operate, and it comes from the public. DB trustees are already telling UKSIF that they are getting more contact from pension scheme members on sustainability issues and it seems likely that DC savers will want to know more about where their savings are being invested. Product providers in the DC and retail markets should focus on the opinions of the young: they are the new savers and the new wealth inheritors, and sustainability issues matter to them. That change in consumer attitudes will complement the current intellectual acceptance of climate change and the increasing recognition of other environmental issues. I am hopeful that these two powerful factors will be boosted by changes in regulation, but either way the trend to sustainable investment seems set to continue.
Simon Howard is chief executive of the UK Sustainable Finance and Investment Association
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