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How investors are gaining influence on sustainability

Author: ICAEW Insights

Published: 04 Feb 2022

Financial rule changes are putting asset managers and investors in the driving seat with businesses over their approach to sustainability and climate change.

As part of the government’s aim to support the transition to net zero, the Financial Conduct Authority recently introduced rules requiring companies and asset managers to disclose information about climate change, in line with the recommendations issued by the Taskforce on Climate-Related Financial Disclosures (TCFD).

Requiring listed companies to disclose information around sustainability issues is intended to help asset managers and owners to assess environmental, social and governance (ESG) risks within their portfolios and to engage with companies to require them to take action.

In turn, asset managers and owners disclosing this information to consumers is to help them make more informed investment decisions, thereby enhancing competition and increasing the flow of funds to sustainable projects. 

Asset managers are expected to engage with companies through meetings, making public statements and voting appropriately for resolutions at company AGMs. Ultimately, if they cannot achieve their aims then they could go for divestment by selling their shares in a company that refuses to change.

Grenfell, Kingspan and its investors 

One such example of this is building materials firm Kingspan. Sustainable, ethical and ESG funds had invested in the company on the basis that it was a leader on environmental issues.

However, it had sold the insulation fitted to Grenfell Tower, where the 2017 fire claimed 72 lives. The Grenfell Tower inquiry heard that the company’s internal documents had said the insulation, when tested, had led to a “raging inferno”. 

The response from different investors varied between engagement and divestment, or a mixture of both.

WHEB, which runs an ethical fund, sold its shares citing “an attitude that prioritised commercial advantage over product safety”. Baillie Gifford, which had held the shares in its Positive Change fund, was reported to have sold some of its holding. Liontrust, meanwhile, told the Mail on Sunday that it “downgraded' the company's sustainability rating, put a freeze on further investments in Kingspan, and had requested a meeting with its management.”()

Changing strategy

However, it is not just about holding meetings or buying and selling shares – the ultimate goal is to change the long-term strategy of the company. This means it needs to have clear objectives and KPIs with the outcome reported. The WWF noted that “climate pledges are not the same thing as emissions cuts in the real world” and that while 74% of the FTSE100 had committed to net zero, only 19% had a technical action plan for how this would be achieved.

TCFD disclosures are a useful first step. But continued action will be necessary to make sense of partial information, ensure consistent data, publish transition plans and use technology to obtain and verify information.

There are no current plans for ESG information to be disclosed as part of Open Finance or Pensions Dashboards and it remains to be seen the extent to which disclosure of sustainability information will influence consumers’ decisions about which funds to choose. Major change will require action from pension scheme and asset managers regarding the structure and operation of default investment solutions. 

There will continue to be strong commercial drivers for poor ESG performance to enable profits to be generated in the short-term. The ultimate negative outcome for the firm, customers and wider society may take a significant amount of time to become apparent.

Returning to Kingspan, the share price is now close to a record high and it remains unclear what action major asset managers still invested have demanded from the company.

There appears to be no or little reflection among any of the investors or asset managers as to why their earlier engagement failed to uncover or challenge the company on its safety or corporate culture. 

Grenfell United, the group that represents survivors and bereaved families, said: “It’s amazing that people still put money into businesses that have demonstrated a clear lack of concern for human life, public safety and a culture of pure greed.” 

You can read more from the financial services faculty here

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