By David O’Sullivan, UK Policy Officer, ShareAction
Following a shock election result, the new intake of Conservative MPs arrive in Westminster this week to take their seats and form the UK’s next government.
While initially all eyes will no doubt be on the vote on the Withdrawal Agreement Bill, beyond this a new government and new parliament brings a host of opportunities for responsible investment.
A strong foundation for responsible investment
Over the last two years the foundations for progress have been laid.
We have seen (and helped to bring about!) a raft of legal changes. Pension funds trustees are now required to factor environmental, social and governance (ESG) issues into their investment decisions. Savers have a legal right to basic information about where their money is being invested. Institutional investors are being compelled to take more robust action on ESG issues. Large companies must report their gender pay data on an annual basis.
But there remains a lot of work to do to build an investment system that truly powers social progress.
For too long the system has been seen to operate in a vacuum, with no impact on the world around us. But this is clearly not the case – and given the UK’s commitments to the Sustainable Development Goals and the Paris Climate Agreement – it is vital we reshape it to operate within the ecological limits of the planet and invest in a fair, just and healthy society.
Legislating for responsible investment
Institutional investors hold trillions in assets, but they aren’t yet using the huge power at their disposal. The most effective way to change this would be to bring forward legislation to instil responsible investment at the heart of the financial system.
Such a law should make clear investors’ responsibilities to take into account savers’ wider interests – over a narrow focus on returns – and to engage with companies on ESG issues.
The Pension Schemes Bill and the pensions industry
The government’s Pension Schemes Bill is expected to resume its passage through Parliament soon – another significant opportunity to ensure our financial institutions act in the interest of savers, society and the environment.
The bill has the scope to align the £3 trillion in UK private pension funds with the goals of the Paris Agreement and the UK’s own net-zero climate commitment, as well as boosting saver engagement and giving employees greater freedom to choose the right pension for their interests and values.
Meanwhile the Financial Conduct Authority is considering new rules for contract-based pension schemes. We expect them to be brought in line with trust-based schemes, with a requirement to consider ESG issues and outline their policy on stewardship.
Making TCFD reporting mandatory
The government has made clear that listed companies and large asset owners should disclose in line with the Task Force on Climate-related Financial Disclosure (TCFD). We expect this to be made mandatory by 2022 at the latest, for listed companies, large private companies, pension schemes, asset managers and banks.
With information about the scale of the threat out in the public domain, investors and companies can begin a meaningful dialogue on achieving the low-carbon transition.
Financing a fair, just, healthy society for all
More and more investors now accept that ESG issues are not a niche concern – but that they are central to the prudent management of financial assets.
And while the UK’s regulatory framework is growing to reflect this, as thinking around ESG shifts, policymakers must keep pace with industry, and start to lead the way.
Transparency is a vital first step towards effecting meaningful change. From corporate reporting on unhealthy food products and banks disclosing their carbon risk, to investors reporting on the way they vote at AGMs, the new government should examine ways they can cement disclosure into corporate practices.
Meanwhile we must remove barriers to capital markets pricing in externalities, such as carbon emissions, and to investors engaging with companies on vital social and health issues, such as our food environments. In doing so, the new government will be able to set the foundations for higher levels of corporate action.
We are moving into a critical decade for action, for both the climate and sustainable development agendas. It is a gargantuan task. Our financial institutions can do a lot of heavy lifting, but we need government to pull the levers. By pursuing a genuinely bold programme of financial reform, the UK can show the world how it’s done.