The EU is considered by many to be the leader in sustainability regulation. This is true in the sense that the EU has been the first to set the foundations for a sustainable finance framework and has a head start in developing the corresponding regulation. But other markets, particularly Asia, are close at its heels and some use the EU’s framework as inspiration.
In our recent study, we travel around the world (alas only digitally and in fewer than 80 days) to highlight key developments in sustainability policy and regulation. We compare the evolution in regulation to that of the sustainable investment funds market and to what clients have been saying about their attitudes.
Sustainable finance in a nutshell
Different regions take different approaches, with some emphasising regulation and some leaving it to the market to grow more organically.
For example, sustainability policy may start with a government setting a goal for reducing carbon emissions. An action plan soon follows, outlining what needs to change in the real economy to achieve this goal, such as developing new technologies, or greener transport and infrastructure. This is then followed by another plan detailing how the financial sector can help fund the transition.
This brings us to what policymakers call “sustainable finance”. In a nutshell, it is a framework for the financial services sector where climate change and environmental risks are considered in everyday business, operations, products and services. The ultimate intention is for this to become business-as-usual, so that private funding flows consistently towards projects and activities that support the transition to a greener economy.
This definition is narrower than the way we, at Schroders, think of sustainability. For us, sustainability is the outcome that is achieved by tying environmental, social and governance risks to investment and capital allocation decisions. By doing so, the investment industry’s fiduciary goals can become aligned to the wider policy agenda.
More than a fad: the proliferation of sustainability policies beyond the EU
Policymakers have been very prolific in recent years. More than 120 new or revised policy instruments with a sustainability focus were established in 2020 – the highest number ever recorded and over 30% more than in 2019, according to the Principles for Responsible Investment. The sharpest increase has been seen in Europe but there has also been significant activity in Asia.
Our research looks into the future and explores how much more is yet to come, with significant developments across Asian markets but also, increasingly, the US. As governments unveil roadmaps and action plans to transition their economies, one thing becomes abundantly clear: sustainability regulation is more than a (European) fad.
The future of sustainable investment
The question then is: how interventionist should this regulation be? The acceleration in demand for sustainability-focused investment funds in the last couple of years shows that there is appetite for such investment already. Is it perhaps better to allow the sustainable investment market to grow more organically?
Given how strong the imperative to tackle climate change is and how tangible its cost has become, the recipe for success lies in confluence rather than collision, with regulation facilitating organic growth. Many ingredients are part of this recipe:
• Regulation that is carefully drafted, meaningfully implemented and not rushed despite the urgency
• Global alignment to avoid duplicative and overlapping requirements
• Government-led industrial policy to complement and support sustainable investing
• Long-term planning and consistent policies and regulations across successive administrations
Written by: Anastasia Petraki, Head of Policy Research, Schroders
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