Responsible Investment Update Q2 2019 (UK)

The latest news and updates from Aon on responsible investment from the United Kingdom. Continue reading the newsletter below to learn more. 


ESG regulations: Are you ready?

TPR updates DC guidance to include ESG

The Pensions Regulator (TPR) has published its updated guidance for DC schemes to cover the changes in law in relation to trustees’ policies on environmental, social and governance (ESG) considerations.

The guidance aims to provide practical information and examples of approaches that could be taken, as well as factors to consider.

DWP extends scope of regulations around trustees’ investment duties

In June the Department for Work and Pensions (DWP) extended the disclosure obligations required of trustees. The deadline is 1 October 2020, with some further requirements by 1 October 2021. The regulations implement certain components of the EU’s Shareholder Rights Directive II and require:

By 1 October 2020:

  • SIPs will need to set out the trustees’ policies in relation to the relationships they have with their asset managers.
  • Publish SIP on a publicly accessible website (schemes that provide DC benefits still need to do this by 1 October 2019).

By 1 October 2021:

  • Schemes will need to produce and publish their engagement policy
  • implementation statement.

PLSA launches new ESG and stewardship guidance for pension fund trustees

The Pensions and Lifetime Savings Association (PLSA) recently published a guide to help trustees comply with the new legislation concerning ESG considerations. The guide, developed by a cross-industry taskforce including Aon, aids trustees to ensure that ESG factors are properly understood and formalised. The guide also aims to prevent trustees from running the risk of being in breach of their legal and regulatory duties.

The PLSA guide breaks down the typical journey facing a trustee as they incorporate financially material ESG factors and provides “practical, step-by-step guidance”. The guide also includes myth-busters, case studies and questions that can be asked of trustees, their advisers and investment managers.

The questions include:

  • What are our legal obligations?
  • How can we develop our understanding in this area up to a level that means I can meet my fiduciary duties?
  • When was the last time we asked our advisers and managers about ESG?
  • How are ESG matters considered as part of the investment process?

You can read the guide here.

PRI Investment Consultants and ESG: An asset owner guide

The Principles for Responsible Investment (PRI) has released a guide to help asset owners ensure that their investment consultants are adequately considering ESG issues.

The guide has sections which cover the different parts of the investment process and includes questions that can be asked of existing or prospective investment consultants. The questions are intended to provide a “menu for asset owners to choose from”, depending on which areas are most relevant to the investor.

You can read the guide here.

UK

Government launches Green Finance Strategy

In July the government published the Green Finance Strategy, which aims to prepare the financial system for the transition to a low carbon economy. The Strategy aims to ensure that the financial system is “robust and agile enough to respond to the profound challenges” posed by climate change, whilst also being well positioned to capture the commercial potential arising from the transition to a clean and resilient economy.

As part of the strategy, TPR will be co-establishing a working group to provide climate change guidance for pension schemes. TPR Chief Executive Charles Counsell stated that “climate change is no longer simply a social responsibility issue. It is a core financial risk impacting broadly across business, the economy and markets”. Counsell added: “climate change is also a risk to long-term sustainability, pension trustees need to consider when setting and implementing investment strategy”.

The Green Finance Strategy can be read here.

UK adopts 2050 net zero carbon target

The UK has become the first major economy to set a legally binding target to end the UK’s contribution to climate change. As one of her outgoing acts, Theresa May wrote to business leaders to confirm that the British government has adopted one of the toughest climate change targets in the world.

The government’s move follows rising concern among the British public over the effects of climate change and the declaration of a climate emergency.

Environmental groups have criticised the “loopholes” within the plan, including a review within five years which could alter the 2050 target and the use of international carbon “offsets” that could be purchased from developing nations.

The former chancellor, Philip Hammond, expressed his concern at the cost of the policy being upwards of £1tn, however critics argued that this ignores the cost of doing nothing and paying for the costs of climate change in the long term.

UK Stewardship Code delayed

In July the Financial Reporting Council (FRC) announced that it will be delaying publication of the revised Stewardship Code until October 2019.

The updates to the Code, which was covered in our previous newsletter, were due to be published and effective from July 2019. The FRC has said the delay is to allow testing of the changes to ensure the Code “will drive distinctive and high-quality stewardship reporting”.

EU

European Commission publishes three important reports on sustainable finance

In June the European Commission’s (EC) Technical Expert Group (TEG) published three important reports. The TEG was established to assist with implementing the action plan on sustainable finance. The TEG is assisting with providing a unified classification system for sustainable economic activities, an EU green bond standard, methodologies for low-carbon indices, and metrics for climate-related disclosure.

1. EU taxonomy for sustainable activities
Producing an EU-wide taxonomy was one of the key proposals of the action plan. This has now been published as a technical report on EU taxonomy for sustainable activities. The report aims to encourage the financing of sustainable growth by providing a common language for market participants which can inform investment decisions and identify investments that are (and aren’t) eligible for a “sustainable” classification.

The report outlines a five-step user guide that could also potentially have a substantial contribution to mitigating climate change. It provides guidance on how investors can utilise the taxonomy most efficiently. The taxonomy will serve as a productive tool for investors to better understand if an activity is environmentally sustainable and aligned with commitments such as the Paris Agreement. It will also help investors comply with EU disclosure requirements on sustainable investment.
Proponents of the taxonomy believe it will drive the market sustainably forward and help companies better disclose information regarding environmental issues.

2. EU Green Bonds Standards
The TEG also published an interim report on proposed EU Green Bond Standards (EU GBS). The report outlines 10 recommendations, three relating to the creation of the EU GBS, with the others relating to how the EU governments, institutions and market participants can support the green bond market through both demand and supply-side measures. The voluntary standards require alignment with the EU taxonomy, publications in line with a Green Bond Framework, mandatory reporting and independent verification.

The EU GBS aims to increase transparency and comparability in the green bond market and address some of the issues in the development of green financial products.

More information on Green Bonds can be found here.

3. EU climate benchmarks
The final report published was the interim report on Climate Benchmarks and Benchmarks’ ESG Disclosures. The report on benchmarks sets out the methodology and minimum technical requirements for indices and disclosure in alignment with the Paris agreement.

The intention is to tackle the problem of greenwashing in benchmarks and enable investors to adopt a climate-conscious investment strategy.

Joint statement by France’s Council of Economic Analysis (CAE) and Germany’s Council of Economic Experts calling for a uniform carbon price levied on all economic sectors in all EU countries

In July France’s Council of Economic Analysis (CAE) and Germany’s Council of Economic Experts on Uniform Carbon Pricing (GCEE) released a joint statement calling for uniform carbon pricing to be levied across the EU to reflect the unforeseen costs of carbon emissions, that may be decades in the future.

The statement presents a range of approaches centred on carbon pricing that would allow for France and Germany to jointly lead the way for a more efficient European climate policy and includes elements of successful carbon taxation in Sweden and British Columbia.

The EU only accounts for 10.5% of global CO2 emissions, implementing a uniform price across all member states would allow the goals of the Paris agreement to be met more efficiently than if each nation takes an individual approach.

The statement proposes that any revenues from the carbon taxes are returned to the private sector rather than entering the government budget and envisages a “carbon border adjustment” for imported goods.

Predicting the political critiques that will come their way, CAE and GCEE state that a uniform carbon price will not affect poorer countries unfairly but ‘by choosing a suitable initial allocation of certificates in a trading scheme or by implementing transfers… developed countries could support the transition of poorer countries’. It is intended that this will assist countries that are still heavily relying on fossil fuels.

To read the statement in full, click here.

Around the world

US Congress rejects European-style ESG reporting standards

The US Congress recently rejected the introduction of European-style ESG reporting standards, dealing a blow to many investors hoping for comparability of disclosures.

The legislation would have required the US Securities and Exchange Commission (SEC) to announce a set of ESG disclosure rules. Historically, the SEC has lagged its European counterparts and has done little to advance climate change disclosure.

It is feared that the US holding off on mandatory ESG disclosure will result in different reporting regimes around the world, a scenario that “would be a tragedy” according to the chief executive of the Global Reporting Initiative, which develops ESG reporting standards, adding “the biggest risk is that the US is not using the international common language”. This is echoed by investors, who have complained that disclosures of ESG risks are too broad and difficult to compare across markets.

The Republican Party argued that the legislation would only “name and shame” companies as well increase costs.

The $1tn cost of climate change – CDP Global Climate Change Analysis 2018

215 of the world’s largest companies expect climate change to cost them $1 trillion, with much of this being in incurred in the next five years, according to a report published by CDP (formerly known as Carbon Disclosure Project).

CDP analysed survey data from 215 of the largest companies in the world and found that these companies forecast $970 billion in extra costs resulting from climate change, including $250 billion in written-off assets.


About Aon
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© Aon plc 2019. All rights reserved.
Copyright © 2019 Aon Hewitt Limited. All rights reserved. Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Nothing in this document should be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial advice and action should not be taken as a result of this document alone. Consultants will be pleased to answer questions on its contents but cannot give individual financial advice. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances.

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