ESG: Time for a regulatory revolution

New EU regulation promoting responsible investment is coming to our shores and not before time, says Thomas Stokes, investment director at Aviva Investors.

Here’s our prediction: within five years your clients’ pension and investments will be invested “sustainably”. We believe the fund managers of tomorrow will be increasingly judged not just by their investment performance, but also on how they approach environmental, social and governance (ESG) issues, such as climate change, inequality and social diversity. Fortunately, these two aspects aren’t necessarily mutually exclusive. In fact, there’s empirical research that shows the opposite. For instance, a Morningstar study analysed 4,900 funds and they found that 59 per cent of sustainable funds had beaten their traditional peers over a 10-year period through to 2019. 1

Why are we so confident ESG investing is going to become more prominent? 

Firstly, we believe there are powerful driving forces behind the demand for ESG investing; this isn’t just a fad. Let’s look at the situation today. Most people have relatively little knowledge of how their pension and investments are invested. Some people may know the name of their pension provider for example, but few will have an awareness of the specific companies and securities they have indirectly handed their money to. In their defence, as an industry we haven’t made it easy for investors to truly connect with their money. 

People are now becoming more conscientious about where they’re investing

On a positive note, just as people have become avid recyclers in recent years, they are now becoming more conscientious about where they’re investing. To give you some numbers, a recent Aviva survey showed that 92 per cent of advisers believe that ESG will be a larger proportion of their business in the next couple of years, and this is primarily due to increased demand from their clients. This surge of interest also seems set to continue, especially with events such as the COVID-19 crisis and the Black Lives Matter movement serving as a powerful reminder of the issues we face today. Ultimately, this push from clients will help to force the hand of the finance industry to do better. 

Other than client demand, an imminent revolution in regulation will also have a huge influence on the industry. 

How influential can regulation really be? 

The answer is ‘very’. Can you remember smoking in restaurants and being able to take your shopping home in a free plastic bag? These unhealthy and unsustainable behaviours changed very quickly thanks to regulation. In a similar fashion, we will also see a shift in the investment world as ESG investing becomes the norm. And, just like the restrictions on smoking and plastics, this change is in everyone’s best interests. 

What is the regulation?

There’s new regulation currently being finalised by the European Commission, which is due to hit UK shores next year. For a financial adviser in the UK, it will mean that they will need to ask their client if they want them to recommend funds that take ESG into account. 

The main objective of the new rules is to educate individuals on responsible investment

At the same time, further regulations will require fund managers to be far more transparent about the ESG credentials of the funds they manage, and advisers will have to explain how they use that information in making their recommendations. The main objective of the new rules is to educate individuals on responsible investment, and, for those who are interested, to ensure they are provided with a suitable ESG solution. 

These moves are just the first ripples in a coming wave of legislation. As ESG investing matures, regulation will strengthen and the definition of what an ESG investment is will become more defined. 

A force for good 

In essence, investment returns are not the only thing clients are going to be interested in the years to come. They will also want to ensure their money is being used responsibly to build a better world for themselves and for future generations. 

A more responsible financial industry can bring about a lot of positive change

The reason we’re so positive is because we believe these two goals are aligned. Moreover, these changes highlight a powerful truth: a more responsible financial industry can bring about a lot of positive change to build a fairer and more sustainable world.

Key risks

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency exchange rates. Investors may not get back the original amount invested.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In the UK this document is issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. 

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.