Countdown To Climate Finance Week: ​Climate Finance – Where Do Asset Managers Fit In? – Finance and Banking


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Countdown To Climate Finance Week: ​Climate Finance – Where Do Asset Managers Fit In?


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The initial focus following the signing of the Paris Agreement
was on the commitments made by governments from around the world to
take action to combat climate change. The term climate finance was
equated with the financial resources committed by governments for
investment in the transition to a climate neutral global economy.
As the UN Climate Change secretariat notes, climate finance
actually refers to local, national and transnational financing,
drawn from public and private sources, that seeks to support
mitigation and adaption actions that will address climate
change.

Europe and climate finance

Significant financial resources are needed in order to realise
these ambitions and the involvement of the private sector in the
transition towards a low carbon, climate resilient economy is
critical. With the environment under increasing stress and pressure
mounting to be part of the solution the European Union adopted the
action plan on financing sustainable growth with the aim of
reorienting private capital to more sustainable investments.

The European response has not been limited to climate finance
and has seen the introduction of measures encouraging investment in
sustainable activities more broadly. The European Commission refers
to sustainable finance as the process of taking due account of
environmental, social and governance (“ESG”)
considerations when making investment decisions, leading to
increased longer term investments into sustainable economic
activities and projects.

Where the asset management industry fits in

One of the ways that private investments can be channelled into
sustainable activities is by making financial products that pursue
environmentally sustainable objectives available to investors and
this is where the asset management industry fits in.

Sustainable investing is becoming one of the best sources of
differentiation for an asset manager in today’s competitive
environment, as has been highlighted in the previous Irish
Funds’ briefing ESG Dating Tips for Asset Managers.
Sustainability is no longer examined by asset owners and managers
in a piecemeal fashion that is limited to the exclusion of morally
objectionable companies; rather a more holistic view is being
taken. Not only is the sustainability of investments being
considered but analysis is being undertaken to determine whether
such businesses are being run in a sustainable way.

Key challenges – consistent and verifiable data

There are, however, some challenges remaining, in particular
relating to how the sustainability of an investment is measured,
both at an investment and at the investor level. The key challenge
at investment level is currently the lack of consistent and
verifiable ESG data while at investor level it is the number of ESG
metrics available and the lack of comparability. Asset managers
aiming to achieve a competitive edge in the sustainable investing
space are working to overcome these challenges, in particular
through increased investment in new tools and talent to harness ESG
data.

Global variation in commitment to sustainable investing

Commitment to sustainable investing varies globally with data
showing that on many metrics the percentage of assets invested in
sustainable investments in Europe is twice that of the US. In
Europe, a number of regulatory initiatives have been introduced to
push asset managers to invest more sustainably including the
sustainable finance disclosures regulation, the taxonomy regulation
and proposals to amend the UCITS, AIFMD and MiFID frameworks to
ensure integration of sustainability risks and consideration of
sustainability factors by asset managers and investment advisors.
In the absence of government intervention across the Atlantic
compelling asset managers to integrate sustainability factors into
their investment process it is expected that EU rules with
extraterritorial effect will be particularly impactful for US firms
doing business in the EU or US managers acting as sub-managers to
EU-based firms under the MiFID regime. Asset managers may be left
with a choice of whether to silo the ESG processes and disclosure
of their EU entities or to alternatively adopt a global best in
class approach to promote an uplift in the standard of ESG
practices across their firms. Inevitably managers will want to take
stock of their current business model, consider how they want to
strategically position themselves in the market in light of the
disclosures that will need to be made and whether their current
policies and procedures are fit for purpose in order to comply with
the relevant regulatory initiatives.

The crucial role of the asset management industry

As economies and society emerge into a post pandemic world more
conscious of the interconnection between human activity,
biodiversity depletion, climate change, and the resilience of our
financial sector then climate finance, and sustainable finance more
broadly, is expected to stimulate positive ESG impacts. The asset
management industry has a crucial role to play in driving the types
of changes necessary to realise a more sustainable
future. 

Originally Published by Irish Funds on 22nd of
October, 2020.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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