How the world is warming to sustainable investing

The EU is considered by many to be the leader in sustainability regulation. This is true in the sense that the EU has been the first to set the foundations for a sustainable finance framework and has a head start in developing the corresponding regulation. But other markets, particularly Asia, are close at its heels and some use the EU’s framework as inspiration.

Sustainable finance in a nutshell

In a nutshell, “sustainable finance” is a framework for the financial services sector where climate change and environmental risks are considered in everyday business, operations, products and services. The ultimate intention is for this to become business-as-usual, so that private funding flows consistently towards projects and activities that support the transition to a greener economy.

This definition is narrower than the way we, at Schroders, think of sustainability. For us, sustainability is the outcome that is achieved by tying environmental, social and governance risks to investment and capital allocation decisions. By doing so, the investment industry’s fiduciary goals can become aligned to the wider policy agenda.

The future of sustainable investment

Given how strong the imperative to tackle climate change is and how tangible its cost has become, the recipe for success lies in confluence rather than collision, with regulation facilitating organic growth. Many ingredients are part of this recipe:

• Regulation that is carefully drafted, meaningfully implemented and not rushed despite the urgency
• Global alignment to avoid duplicative and overlapping requirements
• Government-led industrial policy to complement and support sustainable investing
• Long-term planning and consistent policies and regulations across successive administrations

Andy Howard, Global Head of Sustainable Investment, says:

"Sustainable investing has grown massively in recent years and attention from regulators has been inevitable.

“The message from our clients, through our global and institutional investor studies, has been clear and consistent. Clients need more transparency and better understanding of their sustainable investment options. They need clarity into the goals and strategies fund managers employ and ways to track their performance. Increasingly, many also want to know the impacts their investments deliver.

“We have been listening and have invested heavily in developing our own proprietary tools, such as SustainEx, to measure the sustainability of our investments and quantify their environmental and social impact. That preparation has created the platform that allows us now to comply with new waves of sustainability regulations globally.

“Governments worldwide try to tackle similar challenges, but they take different approaches to implementation and there will be differences in regulation across regions. Therefore, asset managers cannot afford to approach this as a compliance exercise. We need to have a very clear idea and commitment of why and how we approach sustainable investment and then apply it to our funds.

“That is why we think it is important to use a long-term lens and look not just at the immediate requirements, but also what happens beyond that.

“We will engage with policymakers and make our views and, even, concerns heard where we think it is helpful. Sometimes, we may disagree when regulation tries to prescribe the answer rather than provide a framework that facilitates innovation and choice for our clients, but we will never disagree with the effort that goes into turning ‘sustainable investment’ to simply ‘investment’.

“The fact is that, despite its recent growth, sustainable investing is still in its teenage years. The challenges that policymakers and regulators are trying to solve need to be solved. We, as an industry, need to move from rhetoric to action, to demonstrating the benefits of investing sustainabily to our clients. This is what sustainability regulation is getting at. As the saying goes: it is only when the tide goes out that you learn who has been swimming naked. We are reaching a watershed moment worldwide where we find out who didn’t pack their swimsuits. Not a pretty thought."