Regulation driving ESG consideration for investors

‘Responding to legislation’ was the most commonly cited factor for why pension trustees and other asset owners consider environmental, social and governance (ESG) factors in their decision making, a survey conducted by Barnett Waddingham (BW) has revealed.

The survey discovered that 91 per cent of respondents saw responding to legislation as a factor in driving ESG considerations in their decision making, followed by managing risk (77 per cent) and demand from members and policyholders (28 per cent).

BW also revealed that recommendations of their advisers was the most commonly cited reason for investors to make a significant shift in their investments, being mentioned by 48 per cent of respondents.

New regulations was highlighted by 42 per cent of investors, which BW said showed a need for investment consultants to bring ESG risks and opportunities to the table and help investors navigate these issues.

Additionally, when asked what approach they were taking to ESG, 34 per cent said they were just getting started, while 13 per cent of investors stated they were taking a minimum compliance approach to ESG investing.

BW head of policy, Amanda Latham, commented: “Regulation isn’t a blueprint for running a successful pension scheme, trust or endowment and we would urge investors to think beyond regulation and embrace the opportunities presented by sustainable investing.

“Those who effectively manage risks and integrate sustainability considerations into their investment thinking should be well-placed for the transition to a low carbon economy.

“The fact that regulation is the key driver of ESG appetite poses the question of what regulation we need to effectively encourage the economic transition away from reliance on fossil fuels.

“We urge regulators to take note in their drive to get investors to take account of the risks and opportunities stemming from climate change and the shift to net zero. It could be argued COP26 was a missed opportunity to make significant changes.

“In order for investors to be prepared, or even ahead of the game, managing a portfolio’s exposure to climate risk will be essential to achieving good investment outcomes.

“Broader than climate change, we expect to see even more regulation in coming years, including discourses on biodiversity and broader sustainability like inequality and social impacts, so this area is only going to grow in importance for investors.”

The survey also named climate change as the most important ESG theme at 87 per cent, followed by biodiversity and ecology at 49 per cent, and transitioning to a low-carbon economy at 47 per cent.

Themes such as gender diversity (27 per cent), multicultural diversity (25 per cent) and pay equality (22 per cent) also featured.

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