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Travers Smith's Sustainability Insights: The UK's path to a sustainable future

Travers Smith's Sustainability Insights: The UK's path to a sustainable future

Overview

A regular briefing for the alternative asset management industry. 

In a year when good news has been in very short supply, the last two weeks have offered several reasons to be more hopeful. Most notable, perhaps, was news that the Pfizer / BioNTech vaccine candidate had 90% efficacy in its Phase 3 tests (quickly followed by equally positive news from Moderna), giving hope that mass vaccinations next year could spell the end of COVID-19. Meanwhile, the US election result came with a pledge that a Biden-led administration will re-commit to the Paris Agreement on climate change, and take drastic action to reduce domestic emissions, just weeks after China announced that it would target carbon neutrality by 2060. It is self-evident that those announcements are huge: if the world is to tackle the climate crisis, commitments from China and the US are critical.

But, while Brexit negotiators worked away behind the scenes on a trade deal, the UK Government's vision for finance in a post-Brexit Britain also became clearer last week, and investors should take note. A number of significant announcements – timed to coincide with what would have been the first day of the UK-hosted COP 26 summit, the latest round of talks on implementation of the Paris Agreement – confirmed an ambition to be a leader in the green revolution. The specific pledges are likely to have very important consequences for asset managers, including those focused on alternatives, over the next five years and beyond.

Among the most eye-catching announcements was a commitment that the UK will be the first in the world to make reporting under the TCFD, the Taskforce on Climate-related Financial Disclosures, mandatory across the economy, and to develop a UK-specific version of the EU's forthcoming Taxonomy (essentially a classification system to identify sustainable investments). 

the UK will be the first in the world to make reporting under the Taskforce on Climate-related Financial Disclosures mandatory

Mark Carney also used London's three-day Green Horizon Summit to launch a "private finance strategy", with heavy emphasis on climate reporting and risk measurement, as well as the investment opportunities that climate change presents to investors, and the UK endorsed proposals to create international sustainability reporting standards.  Meanwhile, the PRI launched its new reporting framework for signatories (a list that now includes six of the top ten private equity firms) and, speaking at the Travers Smith-sponsored PEI Responsible Investment Forum, PRI's CEO, Fiona Reynolds, confirmed that the new framework focuses more on outcomes than process and that it will be harder to get top scores. She also outlined the PRI's commitment to human rights and the UN's Guiding Principles, highlighting a five-year plan to ensure that signatories are reporting on the social aspects of sustainability.

The headline is that TCFD-aligned reporting on climate change will be required by almost all UK-regulated asset managers – including alternative investment fund managers – and the large UK private companies in their portfolio within the next 3-5 years. Alongside that, companies and asset managers are likely to have to report on their level of alignment with broader policy goals, including under the EU and the UK taxonomy, which will address human rights issues as well as environmental ones. Firms will need to grasp that nettle. Investors will increasingly prioritise managers who are ahead of the curve, as many already do.

Alternative asset managers are ready for these challenges. They know that their business models and governance structures are well suited to a focus on sustainability, and that investor preferences are already driving them in the direction that policymakers are now pushing hard. But, although the policy focus in the UK and elsewhere is welcome, regulation needs to be carefully crafted. As evidenced by the EU regulators' flawed proposals for "principal adverse impact" reporting in the Sustainable Finance Disclosure Regulation (implicitly rejected by the UK, at least for now), one size will not fit all, and interventions must be carefully calibrated. Disclosure is a means to effect behavioural change – and too much information, or the wrong sort, can be counter-productive. The specificities of the alternatives industry make it particularly important to engage positively with policymakers and regulators to ensure that these forthcoming regulations do lead to positive change – reinforcing the market dynamic that has already created momentum, rather than diluting it.

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