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ESG and sustainable finance

ESG and sustainable finance

Overview

Sustainable finance is of rapidly growing importance as increasing regulatory pressures and demand from investors promote the incorporation of environmental, social and governance (ESG) factors in investment portfolios.

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Issues for asset managers and financial intermediaries

Asset owners, as well as intermediaries in the financial services sector, are becoming increasingly proactive in their pursuit of sustainable finance strategies. This is often driven by a genuine desire to move towards more ethical and responsible investment; but increasingly, it is also a necessary commercial response to the demands of clients.  Designing resilience to ESG risks is also an inherent part of investment risk management: protecting capital from hidden liabilities.  As a result, ESG is about much more than just laws and regulation - firms and their clients are becoming more vociferous and more demanding about the sustainability credentials of products and funds in which they invest, and which they offer.

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Issues for pension schemes and their sponsors

For pension schemes and their sponsors, law and practice around ESG and sustainability is developing rapidly.  Key issues include identifying new investment risks and opportunities, addressing ESG, diversity and other sustainability considerations within scheme policies and governing documents, and complying with a growing number of ESG-related disclosure and governance requirements.  Other steps include building ESG and stewardship considerations into pension fund investment agreements and engaging with fund/asset managers about their approach to sustainability and ESG.

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Issues in debt finance and derivatives

Developing a market for bonds, loans and other forms of credit which incorporate sustainability and ESG factors requires compliance with increasingly sophisticated and onerous ESG-related disclosure requirements, ensuring issuers of credit integrate sustainability and ESG factors in their business and risk decisions, and ensuring contracts address and meet particular ESG standards.

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Issues for corporates

Sustainability, CSR, environmental, social and governance (ESG) and other responsible investment considerations are now firmly on the agenda for corporates as well as investors. A considered and proactive approach is required to respond to investors’ ESG concerns, and to ensure reputational and commercial demands are balanced against legal and regulatory compliance requirements and potential liabilities.

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Issues for real estate investors, developers and landlords

The responsible investment agenda has led to a shift in approach from real estate investors, developers and landlords for whom sustainable developments and energy performance is now a key consideration. Renewable energy is an increasingly popular asset class, and landlords and developers alike are prioritising the energy efficiency of their buildings to meet regulatory standards as well as demand from investors and tenants. The Government’s Clean Growth Strategy aims to support businesses in reducing energy use by at least 20% by 2030, backed by legislative measures affecting the real estate industry. Real estate investors and developers are having to reconsider their ESG performance indicators to futureproof their investments, reflected in the emergence of ESG policies, specific benchmarks and increased reporting and performance data.

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Litigation risk

Globally, businesses and other institutions are facing an increasing risk of litigation brought by investors, shareholders and other stakeholders in relation to ESG and sustainable finance. This is a consequence both of the rapidly growing public profile of ESG – we are increasingly seeing governments, institutions, investors and shareholders focusing in on ESG issues and robustly calling businesses to account for ESG failings - and the new laws and regulations which are being introduced in this area in the UK and elsewhere. In particular, we are seeing a trend of increasing litigation in relation to (i) ESG disclosures; (ii) climate change; (iii) working conditions and the supply chain; and (iv) workforce and employment issues.

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Sustainable business

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