The Russian invasion of Ukraine has brought into the spotlight the ‘Social’ category of ESG and in particular consumers’ preferences and impact investing. The West’s response to the events in the Ukraine has been swift and determined: implementation of sanctions, market withdrawals from Russia and public protests.
The social impact of the events in the Ukraine is having a marked impact on consumer consciousness and behaviour. This will inevitably spread to investing, both institutional and retail. But what effect will this have on ESG investing, preferences and reporting?
Right now the ‘S ‘of ESG is still some way behind the ‘E’ in terms of specificity of definition and required reporting obligations. Therefore, the ESG framework in its current form is not going to provide a definite answer to consumers or the industry.
The focus thus far has been on climate related or TCFD disclosures. The Chancellor of the Exchequer at COP26 announced that TCFD disclosure requirements will be rolled out across all in-scope companies from April 2022 onwards. TCFD places further obligations regarding environmental reporting, but will provide little guidance to companies on policing their social obligations in respect of geopolitical conflicts.
Catching up on the ‘S’ in ESG investing is something all stakeholders must work to address. The events in Ukraine make it clear that the “social” part of the ESG equation may yet become a key deciding factor in consumer and investment choices. Detailed, interoperable and consistent standards are currently lacking. Firms and the investment industry are therefore left with difficult choices and little in the way of guidelines. We expect this to change, but meanwhile, a few basic principles can apply.
As well as determining the impact of sanctions on their portfolios, asset managers must now consider their own geo-political standing. For example, asset managers need to determine if they are comfortable with holdings in Russian entities, which may not be subject to sanctions, in their model and bespoke portfolios. All funds have elements of ESG impact to varying degrees and so it is imperative that asset selection is considered. On the asset owners’ side of the equation – investors are going to want to adjust their portfolio holdings, in response to their own ESG preferences. The industry, particularly advisers, are going to need to support investors in this regard.
Consumer preferences relating to political and social preferences must also be brought into preference and suitability processes. The European Securities and Markets Authority (ESMA) is currently consulting on changes to suitability requirements, covering how a consumers’ preferences relating to ESG should be incorporated into suitability processes. The industry needs to be able to ensure the social and political preferences of investors can be accommodated and catered for through reporting and disclosure.
Current events bring to light the crucial role that ESG investing has in this world. Whilst ESG disclosures and responsibilities are certainly here to stay, the nature of disclosures and reporting obligations remain a work in progress. In the meantime, the industry needs find a way to support consumers in their appetite to take a positive stance with their investments.
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