Sustainable investing in the context of ESG: what’s next?
Sustainable investing has gained significant momentum in recent years, driven by increasing global awareness of environmental, social and governance (ESG) factors.
As we delve into the topic of sustainable investing and ESG, it's essential to consider the latest developments and changes that are shaping this ever-evolving landscape within financial institutions. Firstly, it’s important to acknowledge that ESG is becoming more of a general part of the investment process and is being integrated more - so where do we go from here?
The evolving landscape of sustainable investing
Over the last couple of years, several important developments have occurred in ESG.
COP26, which was held in Glasgow at the end of 2021, really built out ESG in the UK and put it on the map. CEOs sat up and took notice, and that really helped to drive the path ESG has been on ever since. According to Henry Daubeney, Global Chief Accountant and Head of Reporting at PwC UK, COP26 was a “major step to globally aligned ESG reporting.”
A year later, COP27 raised (and went a little way to answering) the question of how we, both as countries and companies, will reach the goal of the Paris Agreement - net zero emissions by 2050. The answer, according to Forbes, is technology.
We’re seeing this in action in real time, with many prominent insurance companies and pension funds stepping forward with policies and commitments regarding net zero emissions. Companies such as Aviva, Aegon, BT and Legal & General have made substantial strides in aligning their operations with net zero goals, demonstrating the industry's growing dedication to sustainability initiatives.
Aviva, as an example, is aiming to beat the goal of 2050, and instead achieve net zero 10 years earlier. They are keen to demonstrate their approach and commitment. In 2022, they stopped underwriting insurance for companies that make more than 5% of their revenue from coal or unconventional fossil fuels.
They say that by 2025, “we plan a 25% cut in the carbon intensity of our invested assets. Closer to home, we’re aiming for 100% renewable electricity for all our offices, which total 230,231m2, combined with 100% electric/hybrid vehicle new leases for our 1,540-strong motor fleet. [...] Fast forward to 2031, and we’re targeting a 60% cut in the carbon intensity of investments, combined with having Net Zero operations and a Net Zero supply chain”.
Another good example of a financial institution committing to ESG best practices is Royal London, where asset managers include ESG data when making investment decisions for their clients across all their solutions. With the support of a dedicated Responsible Investment team, asset managers are able to use in-depth analysis and insights to give a company an ESG score and understand the strength of an investment opportunity from an ESG perspective.
This level of transparency allows investors and stakeholders to make informed decisions based on a financial institution's commitment to sustainable practices. It also highlights the increasing accountability and responsibility that companies are embracing in the pursuit of ESG goals.
New UK regulations and their impact
The landscape of sustainable investing in the UK has witnessed the introduction of new advice and regulations.
The FCA’s guiding principles go some way to targeting environmental, social and governance considerations within the financial services sector, requiring businesses to integrate ESG factors into their decision-making processes and disclose relevant information to investors and stakeholders.
The Sustainable Financial Disclosure Regulation (SFDR) articles six, eight and nine also aim to create more transparency around sustainable investing, and help reduce so-called “greenwashing”.
Furthermore, regulators such as the Bank of England, the Pensions Regulator, and the Department for Work and Pensions (DWP) have taken a stronger stance on ESG criteria. These industry bodies have voiced their expectations regarding companies' adherence to specific ESG standards, placing greater responsibility on businesses to meet these criteria.
All this, coupled with a significant push in the right direction from investors, means that financial services businesses are now compelled to incorporate ESG criteria into their strategies and operations. This shift has led to a greater focus on sustainability and responsible investing practices across the industry.
And there’s also more to come, with a UK government consultation concluding on 30th June 2023 that will inform the scope of an ESG regulatory regime.
Geographical variations in ESG
One reason we need more than just UK-facing regulations is that ESG requirements and practices vary across different regions. This diversity is evident across Europe, with each country developing its own style for approaching ESG considerations.
Similarly, the US exhibits regional differences, with the west coast leading the way in prioritising ESG while the south demonstrates comparatively lesser emphasis. New York City stands as a halfway house, where the political climate influences businesses' more cautious approach to ESG.
And it’s not just discrepancies between countries or regions, it’s businesses, too…
The expanding impact of ESG on executive search
The growing significance of ESG factors is reshaping the executive search landscape. As organisations focus on specific aspects of ESG, such as climate change or social impact, the search for qualified professionals has become more specialised. Consequently, executive search agencies are witnessing a shift in the spectrum of job roles related to ESG.
We have seen and dealt with executive ESG & Responsible Investing roles that are anything from ‘teams of one’, with the responsibility for a company’s entire offering, to teams of thirty plus with highly focused roles, such as Chief Sustainability Officer and Chief Responsible Investment Officer. We’re also starting to see the addition of ESG director-level roles where these individuals sit on the board and help to shape and influence the direction firms undertake from an ESG perspective.
This rapid evolution of ESG creates discrepancies across companies. These discrepancies can be observed in job titles, salary structures, benefits packages and job responsibilities, emphasising the need for greater standardisation and clarity within the field. The evolving nature of ESG presents both opportunities and challenges for professionals seeking roles in this field. It’s crucial to assess an organisation's commitment to ESG and its alignment with your personal values when pursuing an ESG-focused role.
If you’re an ESG leader or currently working in this market, we’d like to invite you to participate in a Hanover salary survey. If you’re interested in participating, please contact Rob or Em directly. Your participation will contribute to a better understanding of the compensation landscape in the ESG sector.