ESG and Responsible Investment

Last week the University of Bristol Business School, along with the Chartered Institute for Securities and Investments, hosted ‘Bank of England economic update and ESG from a stewardship perspective’. Dr Yi Li, Lecturer in Accounting and Finance, attended the event, here she outlines her key takeaways.

In the dynamic and ever-changing financial world today, the incorporation of Environmental, Social, and Governance (ESG) principles has emerged as a critical aspect of responsible investing. At an event jointly hosted by the University of Bristol Business School (UOBBS) and the Charted Institute for Securities and Investments (CISI), sustainability and governance analyst Matt Crossman, provided expert insights on the multifaceted world of ESG from a stewardship perspective. Here, we present our top 5 takeaways:

Recap and Refresher on Responsible Investing and Stewardship
Responsible investment is defined as the “purposeful integration of environmental, social, and corporate governance (ESG) considerations into investment management processes and ownership practices.” Top global risks have been shifting from economic concerns to environmental issues, with climate changing taking center stage. Many studies underscore the positive correlation between superior ESG performance and corporate financial performance. However, the asset management industry has untapped potential in fully translating ESG analysis into actionable alpha-generating strategies.

Emerging Regulation
We are currently witnessing a global surge in regulatory initiatives. In Europe, the EU SFDR (Sustainable Finance Disclosure Regulation) holds a central position in defining sustainable investment criteria. The EU Taxonomy establishes a standardized framework for sustainable activities, encompassing actions aimed at addressing climate change, ensuring responsible water resource management, transitioning to a circular economy, pollution prevention and control, and the preservation of healthy ecosystems. The UK proposed sustainable investment label descriptions and objectives, and the UK Stewardship Code of 2020 set principles for asset owners, asset managers, and service providers.

Integrate and Engage in ESG to Fulfill Fiduciary Duty
ESG has transformed from an “acceptable consideration” to a “require” component of asset managers’ fiduciary duty in the 21st century. Three main reasons supporting ESG incorporation are highlighted, reinforcing the notion that failure to consider ESG issues equates to a failure of fiduciary duty:

  • ESG incorporation is an investment norm
  • ESG issues are financially material
  • Policy and regulation frameworks are changing to require ESG incorporation

The ‘ESG Backlash’
An “ESG backlash” has been gaining momentum within the financial realm. In the US, a notable alignment exists with individuals opposing climate action efforts. The Russia-Ukraine conflict had a profound impact on the ESG landscape, leading to shifts in investment priorities as some redirected their focus toward more conventional sectors like defense. The energy trilemma questions the feasibility and cost of achieving ‘net zero’ and the implications for investors. Exploring the intricate balance between ‘cost’ and ‘investment’ on climate actions, it become evident that the “net zero” is the least bad option for investors.

“With great power comes great responsibility.” For the future of ESG, the growing influence and accountability held by ESG ratings providers should be highlighted. The regulatory landscape, both in the UK and internationally, should be under scrutiny, with a focus on standardizing sustainability disclosures and meeting the information needs of investors.

Find out more about the impact of University of Bristol Business School research.

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