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U.K Asset Managers Brace For Increased ESG Scrutiny

The challenge U.K. asset managers face in balancing their fiduciary duty to deliver returns to clients with the growing demand from investors and regulators for investments to be sustainable has intensified recently according to Cerulli Associates, a research and consulting firm. It believes that U.K. asset managers should brace for increased scrutiny of their environmental, social, and governance (ESG) capabilities, for example responding to the updating of the country’s Stewardship Code by the Financial Reporting Council, the introduction of additional policies relating to pension funds’ statements of investment principles (SIPs) by the Department for Work and Pensions, and the launch of a new supervisory mandate that affects insurers by the Prudential Regulation Authority.

"It all means extra work for managers, but, jointly, the three sets of regulation should also make it easier for managers to identify gaps in their ESG capabilities and to establish a progression strategy for responsible investment,” says Connor Bigland, analyst, European institutional research at Cerulli Associates.

Cerulli also believes that the question of how best to serve the engagement demands of individual clients within pooled investment structures is likely to resurface. “Initiatives such as Red Line Voting—an approach developed by the Association of Member-Nominated Trustees that sets minimum expectations that pension schemes can apply to investee companies—may provide solutions to the dilemma,” says Bigland. He advises managers to start developing and disclosing more sector and asset-class specific engagement guidelines.

Cerulli cautions that insurance companies, in particular, need to develop an approach to climate-related financial disclosures and introduce long-term scenario analysis. To do so they will need asset managers to provide more granular data.

“For insurers with a greater capacity to produce bespoke scenario analyses, the preference will be for data. Because the risk profiles of insurers differ depending on the scenarios they provide cover for, others may be more susceptible to biases found in key climate forecast methodologies,” says Bigland.

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