Collaboration and Reconciliation

Jason Mitchell, the new Chair of the UK Sustainable Investment and Finance Association, outlines the organisation’s role as a convening space, the need to reconcile regulatory fragmentation, and calls for greater collaboration on climate from across the financial ecosystem.

Jason Mitchell was appointed Chair of the UK Sustainable Investment and Finance Association (UKSIF) in December 2022. He tells ESG Investor that 2023 is a “unique time” for sustainable finance, with regulation in the UK and the EU serving as an “activating force” within the market. 

In particular, he cites the UK’s Sustainable Disclosure Requirements (SDR), the EU’s Sustainable Finance Disclosure Regulation (SFDR) and Sustainable Finance Strategy as key frameworks that act as an “accelerant” for the objectives of UKSIF and organisations like the European Sustainable Investment Forum (Eurosif) and the European Fund and Asset Management Association (EFAMA). 

“Regulation is driving change across the sustainable financial ecosystem,” he says. “I’m really excited about the role that UKSIF can play in shaping this system moving forward.” 

UKSIF brings together the UK’s sustainable finance and investment community, with it counting Aviva Investors and abrdn among its 300+ members, which manage more than £19 trillion (US$23.3 trillion) in AuM. The organisation works to promote the sustainable finance agenda, working closely with policymakers to remove barriers to the growth of sustainable investment and deliver progress towards decarbonisation of the UK economy.  

“We are part of the discourse, that active debate around sustainable finance legislation, which the Financial Conduct Authority (FCA) wants to hear,” he says. “We represent a space that is not reactive to regulation, but proactive.”  

Mitchell says that UKSIF aims to be “constructively critical” when engaging with policymakers and regulators, citing the organisation’s responses to the FCA’s consultation on SDR and UK Transition Plan Taskforce’s request for feedback on its disclosure framework and implementation guidance.  

He stresses that under his leadership he wants to amplify UKSIF’s role as a “convening space”. While sustainable finance has been predominantly represented by institutional investors, it is in reality a “much wider ecosystem”.  

UKSIF aims to bring together asset owners and managers, lawyers, auditors, assurance, data providers and banks to share insights and “cultivate the next generation of leaders” within the sustainable finance industry.  

“Everyone in the industry plays a vital role in interpreting and reconciling the regulatory fragmentation that we are seeing in sustainable finance,” he says. 

Dividing standards 

On the topic of fragmentation, Mitchell notes that significant questions remain around standard setting, particularly with regards to the International Sustainability Standards Board’s (ISSB) global standards.   

Many have called for the ISSB’s standards to be based on ‘double materiality’ – meaning sustainability-related disclosures will not only outline how such issues impact companies, but how the companies affect the environment and wider society.

“We’re in a real divide around standards and some of the fundamental components within them,” Mitchell says, adding that he believes the UK can play a vital role in helping reconcile that “great divide”.  

Mitchell was a part of the European Financial Reporting Advisory Group’s (EFRAG) steering committee between 2019-21, giving him a “flavour” of the European approach to standards and their proclivity for double materiality, adding that the ISSB is trying to balance different “sensitivities”.  

In the US, the concept of single materiality is a fundamental proposition in US securities law and in its capital markets more broadly. However, it is unclear whether the US Securities and Exchange Commission (SEC) will introduce the concept of double materiality to bolster climate-related disclosures, especially amid the backdrop of a rising anti-ESG movement.  

“From a European perspective, the ISSB is weighing a little too heavily on financial materiality,” says Mitchell, adding that this is not a “small divide” and one “rooted as far back as the US Securities Act of 1933”. 

The language and linguistics that define the concept of financial materiality in the US are fixed, he says, but acknowledges that the division over what is and isn’t material must be reconciled. 

According to Mitchell, the UK’s proximity to the EU post-Brexit and its “special transatlantic relationship” with the US means it could have a hand in reconciling the materiality gap and regulatory fragmentation more broadly. 

Slow and steady 

In February, Chief Secretary to HM Treasury John Glen outlined key aspects of the UK’s sustainable finance ambitions over the course of 2023 and beyond. As part of the much-anticipated Green Finance Strategy, he noted that UK will launch a new policy framework for nature markets.  

According to Glen, the new framework “will provide clearer principles and policy guardrails for the development of new nature markets, including new arrangements to accelerate the adoption of robust standards for investing in a broader range of ecosystem services”. 

He also reiterated the UK government’s commitment to upholding pledges made in line with the Global Biodiversity Framework (GBF) and continuing to support the development of the Taskforce on Nature-related Financial Disclosures (TNFD). 

UKSIF welcomed the speech, says Mitchell, particularly the UK government’s support in helping to develop the TNFD given the “complexities” that surround it, noting that the new framework is “double materiality oriented” in comparison to the Task Force for Climate-related Financial Disclosures (TCFD) which is more financial materiality-aligned.  

Mitchell once more notes the important role the UK must play in reconciling different sustainability reporting regimes.  

But before it can solve global issues, the UK government must get its own house in order, with it delaying the Green Taxonomy to “get it right”, only for UK Chancellor Jeremy Hunt to announce in the Spring Budget last week that nuclear energy will be labelled as environmentally sustainable under it when finalised.  

Further, the UK government is yet to publish its Green Finance Strategy, putting it at risk of falling behind the EU and the US in advancing the green finance agenda. Andrew Griffith, Economic Secretary to HM Treasury said in February that the UK will publish its updated strategy “in the coming months”. 

Mitchell acknowledges that the UK government has not yet made “overt efforts to realign the economy from a bottom-up perspective” in quite the same way the EU and the US have done, citing then US Inflation Reduction Act (IRA) which aims to reduce carbon emissions by 40% by 2030, and the EU’s Net Zero Industry Act and Fit for 55 decarbonisation package. 

However, he believes that the UK has a stable environment for turning frameworks and standards into long-term legislation. 

The IRA might have put the US on a path to almost halving its carbon emissions by 2030, but its journey to net zero remains under threat from political polarisation.  

US climate regulation remains confined within specific electoral cycles,” says Mitchell, noting how the Obama administration’s Clean Power Plan, which aimed to combat anthropogenic climate change, was unravelled by successor Donald Trump via an executive order.  

Collaboration around climate 

Mitchell stresses the importance of investor engagement with policymakers to support sustainable finance policy reform, but admits it remains a relatively nascent area for many.  

“Generally, investors have thought about engagement at the corporate level,” he says. “But policy engagement is increasingly viewed as a powerful lever to create real-world sustainable outcomes when complemented by engagement on the corporate side.” 

The importance of public policy for sustainable investors has grown significantly in recent years due to an increased understanding of the implications of sustainability issues for the stability, resilience and overall performance of financial and economic systems.  

Investors can attempt to engage with policymakers on an individual level, he says, but admits that it requires significant size and scale in terms of AuM, with smaller players in the sustainable finance space advised to collaborate with organisations like the UN Principles for Responsible Investment (PRI) which actively engages with public policymakers where relevant to its principles and mission.  

Each year the PRI sets out policy priorities that summarise the key policy topics and developments in core markets where the PRI is conducting policy research and engagement. These priorities reflect the PRI’s strategy and its current policy agenda in different markets. 

Mitchell says that since the PRI was established in 2005, the global financial system has undergone a significant transformation. “Pre-2005, the financial system had been very atomised and focused on working on its own interests,” he says, adding that in the years that have followed sustainable finance has had a “powerful, cohesive effect”.  

An example of this effect can be seen in the UK Competition and Market Authority’s (CMA) plans to help businesses collaborate on climate-related initiatives to reduce carbon emissions and improve climate adaptation across the economy. The CMA’s new guidance will allow businesses to take action on climate change and environmental sustainability, without undue fear of breaching competition rules. 

Looking ahead, Mitchell warns that inflationary pressures, particularly around energy prices, threaten to create a short-term setback and lead to a “pause around the performance of sustainable finance strategies”.  

He also reiterates ongoing political uncertainty and the anti-ESG movement, particularly in the US, as another, potentially destabilising force within the sustainable finance space, especially if the backlash is “exported to other countries”.  

This month, Republican Governor of Florida Ron DeSantis announced an alliance with 18 states to “push back” against the Biden administration’s ESG agenda.  

Despite the myriad of headwinds, Mitchell says that such challenges should be viewed by the community as an opportunity for market participants to “sharpen their resolve and rationale” for sustainable finance.

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