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Countdown to Climate Finance Week: ​Climate Finance – Where do asset managers fit in?

22 October 2020

By Jill Shaw and Joe Mitchell, Walkers

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. 

Climate Finance Week 2020 will be taking place 2-6 November. Find out more information at about the series of virtual events that will be taking place.

Article Contributors

Jill Shaw, Professional Support Lawyer, Walkers

Jill is the professional support lawyer for Walkers' Asset Management & Investment Funds practice in Ireland. Prior to joining Walkers, Jill advised fund promoters, asset managers and service providers in relation to the structuring and formation of Irish domiciled funds and provided advice on general funds legal and regulatory matters both in Ireland and in the British Virgin Islands. Jill is a lecturer on the Law Society of Ireland's Diploma in Finance Law.

Joe Mitchell, Senior Associate, Walkers

Joe Mitchell is a senior associate in the Walkers' Asset Management & Investment Funds practice in Ireland. Joe focuses his practice on investment funds and has advised on a wide range of legal and regulatory matters with an emphasis on the structuring, establishment and operation of many types of funds in particular AIFs and UCITS. Prior to joining Walkers, Joe has been seconded to leading global investment managers in London and Dublin. Joe is a member of the Irish Funds UK Distribution Working Group."

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