For financial professionals only
In March this year, the UK government formally directed the FCA, and other UK regulators, to embed climate change within its core remit[1].
This follows various other initiatives including:
- The government’s 10-point plan for a green industrial revolution, supported by funding from green NS&I bonds and green gilts to be issued from this year.
- A new green UK taxonomy to define which activities can be defined as environmentally sustainable.
- The need for UK premium listed companies to report on additional climate change related metrics (in line with Taskforce for Climate-related Financial Disclosures) from 2022.
- A new UK infrastructure bank in Leeds, established in the March 2021 budget with £12bn of initial capital to finance green infrastructure projects.
- Hosting of the next global climate conference, COP26, in Glasgow in November.
Embedding climate change at the centre of regulatory remits is the latest development in this megatrend towards greater focus on sustainability.
What does this mean for advisers?
Advisers can expect more client conversations about climate change, so it may be time to formally factor sustainability into advice processes.
Advisers may also consider how best to assess providers on their sustainability and climate change credentials, particularly looking at how investment managers select funds and/or companies to invest in, and how they run their own businesses.
To help advisers and consumers, the FCA is currently working on 5 potential principles for assessing sustainable products in a consistent way and ensuring they’re delivering against the sustainability objectives[2]. This should go a long way in combatting “greenwashing” and reducing the risk of sustainable products failing to live up to expectations.
How does climate change factor into PIM’s investment solutions?
ESG embedded in fund due diligence for all solutions
We believe that, as with other ESG issues, climate change is a growing risk with potential financial consequences. That’s why we ask fund managers about ESG as part of our fund due diligence – for all of our solutions. This is recorded in our research notes and fed into our team decisions on whether to buy or sell a particular fund.
Dedicated Ethical Profiles
We also have a Sustainability Leaders Profile within our Ethical solution. This focusses on companies seeking to support a sustainable environment and other sustainable social issues. Our track record in sustainable investing now goes back over 9 years and our proven, disciplined, robust and repeatable process is supported by oversight from our independent, highly experienced Ethical Oversight Committee. This means clients can be assured they’re getting access to genuine leaders in sustainable investing, in a risk-controlled manner.
Our ethical fund due diligence process assesses:
- Sustainability approach.
- Investment team expertise and any relevant qualifications e.g. environmental science degree.
- Internal and external research. We’ve recently introduced Pictet’s Global Environmental Opportunities fund, which is based around the Stockholm Resilience Centre’s planetary boundaries academic approach.
- Membership of industry groups like Climate Action 100+, Carbon Disclosure Project and the UN PRI.
- Examples of engagement with companies on sustainability issues and outcomes.
- Holdings to see the exposure to more sustainable sectors (e.g. renewable energy, healthcare) vs more polluting sectors (e.g. utilities, industrials).
- Key portfolio metrics such as intensity of carbon emissions and ensuring this is sufficiently lower than the broad market.
Keeping our finger on the pulse
We’re keeping up to date with the European sustainable finance regulations and implications, so, if and when something similar comes to the UK, we’ll be ready to act. We’ll keep you posted on developments.
Exciting times ahead
It’s an exciting time for sustainable investments. The latest announcement on the FCA and other financial regulators embedding climate change will help drive further awareness and planning by companies. This is a really positive step to support the transition to a resilient, environmentally sustainable, net zero economy.
[1] Recommendations for the Financial Conduct Authority, March 2021, assets.publishing.service.gov.uk
[2] Building trust in sustainable investments, November 2020, fca.org.uk
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.