Brexit isn’t the only issue to have grabbed the headlines recently. No one can have failed to notice the protesting Extinction Rebellion activists blocking roads and airports, particularly if, like me, you were stuck in a long queue at London City trying to catch your flight back home. Whilst I might not like the disruption to my day I can’t argue with the purpose behind it.
Issues such as climate change, cyber security and corporate governance are increasingly recognised as factors that can impact long term investment returns and of course our savings. This wider societal shift fuelled by growing concern for the planet and the impact that business activities are having on the environment is also moving up the agenda of policymakers, regulators and financial institutions.
According to Charles Counsel, chief executive of The Pensions Regulator, “Climate change is no longer simply a social responsibility issue. It is a core financial risk impacting broadly across business, the economy and markets"1. The UK government has committed us to a net zero carbon economy by 2050 which will require a huge reallocation of capital and the last few years has seen a step change in the amount of financial regulation which focuses on sustainability and climate change.
The direction of travel is clear and will be an important driver of transparency and accountability as well as setting higher expectations of asset managers and asset owners, such as ourselves.
As the UK’s largest mutual, we’re committed to being a responsible investor and embedding climate change considerations across our investment processes, business planning and in the way we manage our own operations.
Going forward we’ll be more proactive in asking the asset managers we work with to include financially material environmental, social and governance (ESG) risks and opportunities when they make investment decisions. We believe this will help to manage risk, and in turn generate better long term results for our customers.
We’ll also monitor how they are helping us fulfil our stewardship responsibilities. For example, by voting at shareholder meetings, engaging with company management, or pushing for higher industry standards. In 2020 we will sign up to the UN Principles of Responsible Investment (PRI), the UK Stewardship Code and the Task Force for Climate Related Disclosure and will report publicly on our progress against these frameworks.
From next year we expect to see new regulations which will require firms to take account of client preferences on sustainability when giving investment advice. The increased focus from providers and asset managers provides a good opportunity for you to understand more about responsible investment, ESG and the perceived trade-offs in advance of the regulation.
Our own research2 shows that while the majority of customers make conscious social and environmental impact decisions in their everyday lives, this doesn’t always translate to decisions on financial services. Instead they prioritise returns, risk and costs over any ESG or sustainable investing factors. However, when asked over half said they were interested in finding out more about our policies and practices relating to responsible investment. This shows that people don’t naturally connect their savings with the ability to make a social or environmental impact but this is an area which is moving at pace.
Now might be a good time to start considering how to embed ESG preferences into client fact finds and annual reviews so that the service and proposition you provide to your clients continues to meet their needs.
Find out more about Royal London’s approach to responsible investment.
Head of Investment Solutions
Lorna is Head of the Investment Solutions team at RLI and has responsibility for the development and promotion of Royal London's investment proposition including the award winning Governed Range. She has worked in pensions and investment since 1990 and holds the IMC qualification and a Masters in Investment Science.