This theme of transitional finance is very much in evidence in industrial economies such as China and Japan where policymakers are prioritising the decarbonisation of heavily-emitting sectors.
Looping back to the UK’s new labelling scheme, the SDR, there are parallels here with the Sustainability Improvers label, where investment is focused in assets that have the potential to become more sustainable over time.
Of course, this has implications for advisers, who will need to understand client appetite for investment in assets that do not yet meet an absolute standard of sustainability.
One final point to note here is that regulators are much further behind on developing taxonomies for the many social aspects of sustainability.
ESG backlash in the US
Last year, there was a surge in criticism of sustainable investing in the US.
Ostensibly, this stemmed from concerns around the appropriateness of incorporating ESG factors into investment decision-making, even though policy-makers globally suggest the very opposite is true.
It seems that investor support for climate-related shareholder resolutions at oil and gas companies was seen as a threat to the industry.
In response, oil-producing states like Texas sought to stymie sustainable fund managers by introducing anti-ESG bills.
In addition, the adoption of sustainability policies by prominent asset managers was construed by some on the political right as advancing a liberal social agenda, raising concerns among socially conservative and religious voters.
Yet, in fact, there’s a strong overlap between the exclusionary criteria required by faith-based investors and those often applied by sustainable fund managers.
Even though many of the proposed anti-ESG bills have not been signed into law, the overall effect has been to stifle investor support, in public at least, for sustainability-related initiatives.
The term ‘ESG’ is being erased from the lexicon of US investment managers and, more significantly, US sustainable funds have seen outflows for the four consecutive quarters to October 2023.
There are many drivers of that, including high interest rates and high energy prices. In addition, a re-categorisation undertaken by the US Sustainable Investment Forum has halved the estimated AUM invested in sustainable funds.
Key considerations for advisers
Four key considerations that advisers and their investors should be looking out for if they want to have a sustainable, global portfolio include:
1) The SDR labels
The FCA intends to consult in early 2024 on the feasibility of extending SDR to portfolio management. It goes without saying that advisers should take heed of how their third-party managers use SDR labels, if at all, and if they can: the scheme does not apply currently to overseas funds.
