Margarita Pirovska, Director of Policy, Principles for Responsible Investment, and Will Martindale, Co-Head of Sustainability, Cardano, highlight priorities for investors as policy engagement becomes a key part of the day job.
As PRI in Person closes today in Barcelona, gathering more than 1,700 investors and stakeholders in person for the first time since 2019, one key message throughout has been that policy matters, now more than ever.
Public policy sets the rules of the game for the investment industry. It defines roles, responsibilities and accountabilities for asset owners, investment managers, advisors, and service providers. Policy ultimately aims to build the foundations that support the development of society towards shared goals, taking into account collective interests and political preferences, as well as addressing market failures.
Hardwiring sustainability into financial regulations is already on policymakers’ agenda. Research prepared by the Principles for Responsible Investment (PRI) shows that there are close to 900 policy tools or revisions that support responsible investors in 2022. By comparison, in 2019, there were fewer than 600; and in 2013, 300. Investors have an important role to play in this context: to ensure that those policy reforms are effective, ambitious and that support a sustainable financial system.
PRI in Person started earlier this week with a reconvening of its second sustainable finance policy conference. We saw 250 policymakers, investors and NGOs come together to discuss global developments in public policy change, across three core themes:
- Sustainable finance regulations
- Bridging the gap to sustainability outcomes
- Economy wide transition: connecting financial and real-economy policy change
We expect that public policy will be top of investors’ agendas in the coming years, far more so than previously. For sustainable investment professionals, reporting against the Sustainable Finance Disclosure Regulation (SFDR) or the Task Force on Climate-related Financia Disclosures, stewardship code disclosures, and standardised, comparable corporate reporting are now part of the day job.
Policy takers and policy shapers
Policy engagement by investors is also increasingly part of the day job – the extent to which investors are policy takers (we do what we’re told) or policy shapers. In particular, the extent to which investors engage policymakers to shape more efficient and ambitious policies, that support a sustainable financial system, address inconsistencies, and support the design of effective policies, that help to achieve sustainability outcomes.
So, with a greater role to play, what key questions should responsible investors consider as part of their policy engagement? From our perspective these should include:
- Corporate reporting: Globally, how to harmonise disclosure frameworks, including the actions necessary to establish International Sustainability Standards Board’s voluntary approach to become a mandatory global baseline incorporated into regulatory frameworks.
- Taxonomies: Promote science-based, technology-neutral, usable taxonomies classifying activities as sustainable against environmental objectives.
- Regulatory cohesion: At the time of writing, many European investors are determining their SFDR disclosures for Article 8 and 9 funds. On sustainable finance policy, Europe is the world’s trailblazer, and deserves credit for that, but coherence and consistency are necessary across policy files.
- Real-economy policy: The importance of aligning fiscal incentives with sustainability goals. Taxes and prices that address key failures of current frameworks, on carbon emissions but also broader environmental and social issues. Public policy engagement is not just about sustainable finance regulation, but real-economy policy change, too.
- Policy and politics: In the US, despite the political ‘ping-pong’ of sustainable finance rules, the need for real economy policy reform gave a significant push to sustainable investment opportunities though the whole of government approach of the Inflation Reduction Act.
Going further, the PRI’s Sustainable Finance Policy Engagement handbook provides concrete recommendations to investors on the why and the how to engage with policymakers.
Real economy impact
A game changer is the legal analysis commissioned by PRI, the United Nations Environment Programme Finance Initiative (UNEP FI) and The Generation Foundation and conducted by law firm Freshfields Bruckhaus Deringer, in the landmark report A Legal Framework for Impact, which finds that where sustainability impact approaches can be effective in achieving an investor’s financial goals, the investor will likely be required to consider using them and act accordingly. The performance of the real economy impacts portfolio performance. This presents a compelling case to engage policymakers on sustainability outcomes, where those sustainability outcomes are linked to long-term financial growth.
Indeed, in its model of influence, UK and Dutch investor Cardano categorises policy engagement (alongside collaborative engagement and supply new capital to sustainability solutions) as a high impact and direct way of achieving real-world sustainability impact.
Policy engagement is a natural extension of investor duties. In a goal-oriented world, investors need ambitious, coherent policy reforms that will limit the investable universe to 1.5°C, while addressing other challenges such as environmental degradation and human rights abuses. Whatever the size or type of investor, there are ways to participate – engaging policy makers directly or in collaboration, or for asset allocators, incorporating effective policy engagement in assessment of asset managers.
While emissions are still rising – the time is now.