10th March is not a particularly memorable historical date. It did, in 2000, mark the top of the dot-com bubble, but other than that, it hasn’t registered too much with the historians.
However, 10 March 2021 will be a very significant date as it is when the requirements of the Sustainable Finance Disclosure Regulation (the SFDR) comes into place. This EU's regulation on sustainability‐related disclosures in the financial services sector imposes transparency and disclosure requirements on financial market participants in Europe. This aims to put an end to greenwashing and give clients reassurance and confidence when choosing between providers.
While this is a European requirement, it is symptomatic of a zeitgeist that is gaining momentum across the world. For example, in the pension space in the UK, the Department of Work and Pensions have required that Defined Benefit pension schemes must meet climate governance standards as set by the Task Force on Climate-related Financial Disclosures (TCFD). In the insurance space, European Insurance and Occupational Pensions Authority (EIOPA) and other regulators are pushing insurers to integrate climate scenarios into their standard risk calculations.
At their core, these regulations are requiring all players in the asset management industry to connect how the sustainability challenges we face could impact current and future investments, and vice versa, and build that into their future strategy. However, as Bill Gates has shown in his recent book, the world has been powered by fossil fuels and the transition is going to take time – blind divestment is not going to be the answer.
This is going to be hard,
it is going to be complex and
it is going to require thought.
I have watched with interest over the last number of months as firms that until recently could not spell out ESG or only came across sustainability when moving between stocks and treasuries in the dictionary, have been trumpeting their developments.
We, as investors, are stewards of capital. We allocate capital to where it is potentially going to be rewarded and ideally scarce, and avoid areas where we believe hype has led to over allocation.
Hence why we believe in phased journeys over time, with a focus on decarbonisation at the right price. Capital destruction that comes from ignoring the changing sustainability landscape should be avoided; providing and trying to work with those people who need it to enable transition should be prioritised.
But it is not easy being green. It has taken us many years to get prepared, and we’re glad we did.
For example, the UK rules, recognising the difficulty of detailed climate modelling, have said that modelling every 3 years is a reasonable compromise. For clients using our dynamic de-risking solutions in the UK or our Defined Contribution solutions, that modelling is already standard and built into the annual Asset Allocation Strategy updates.
In another context, how can you know how much carbon your portfolio is emitting, and if your managers are doing what they said they would do? We have built that data into our risk systems and are already monitoring outcomes and challenging managers on an ongoing basis.
Lastly, how are you going to follow a sensible decarbonisation journey, avoiding greenwashing & pitfalls? We have integrated our Analytics for Climate Transition (“ACT”) tool into our asset allocation and asset class processes to build decarbonisation journeys which prioritise companies with current or potential transition capacity and steer capital away from those that don’t.
Sustainability is not as simple as removing emissions figures from a portfolio spreadsheet. From 10th March we’ll see who is ready for the journey and who was planning to rely on shortcuts.
Join me at the PLSA Investment conference on 11 March where I will be on the panel for the session “seeking returns - the CIO session”.
© 2021 Mercer LLC. All rights reserved.
References to Mercer shall be construed to include Mercer LLC.
This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s prior written permission.
For the avoidance of doubt, this is not formal investment advice to allow any party to transact. Additional advice will be required in advance of entering into any contract. The opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results.
Issued in the United Kingdom by Mercer Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 984275. Registered Office: 1 Tower Place West, London, EC3R 5BU