Climate Change 2011 Part 2 - The regulatory perspective

Matt Christensen

Looking at the regulatory side, from the perspective of the previous five years, let us say from 2004-2005 to 2009-2010, very little was actually happening in Europe. And then when you think about some of the initiatives that have taken place subsequently, starting around 2006 and moving into the crisis that has come about, it is actually remarkable how things can change. If you look at the EU setting itself, the right ministry is looking at this area, financial services and climate change. There has always been an issue in the EU about, ‘Where does this fall from a regulatory perspective?’ It was shared amongst a number of different ministries. It has rolled up into the Internal Market Ministry, which is the one that is most responsible for financial regulation across the EU, and right now it is about trying to ensure that they do not go too far. To some degree I am happy to see that they have actually taken on board and said that this is an area that can be thought through in a way that is helpful for the financial markets.

One of the initiatives that keeps coming up and has been bounced around – aside from all the banker bonuses, which came up quite a bit last year – has been really about how to integrate some of these issues into a regulatory framework that is helpful. In Denmark, for example, regulation at the nation state level, the Danish law, which is both looking at corporations and also investors, has been pointed to by the European Commission as one that could be of interest to replicate across the other Member States. This is largely saying, ‘There are existing initiatives in the market place; let us point to them and use those as frameworks and not add on a whole bunch of new regulation and a new bunch of thinking that does not correlate to what is happening round international trends.’ Global Compact and UNPRI are areas that the commission is looking at, and saying, ‘Can they create regulation that asks for a mandatory framework for reporting, as one basis, on climate change issues, that for example, companies need to include in their annual reports which are then third-party audited? What are the key risks that they face around climate change?’ As opposed to right now, where it is not really done that way.

It is the same with investors: what is the investor policy around dealing with climate change factors? Do they have one? If not, why not? If they do, what is it? These, I think, are drivers from a regulatory perspective. Five years from now I think we will see a different landscape regarding the role of both investors and companies in this debate.

What I see happening, on one side is positive, because I think we are going to see change from a framework perspective within these issues; but on the other side, there is a concern I have, and that is the following. If it goes the route of a compliance-orientated framing then I do not know how much it will help us. Certainly in the US we have seen some examples of that, where if it becomes just an issue of, ‘Give it to my compliance department and check the box,’ then in fact that is just a technical solution. And when we are thinking about drivers, I do not think it will be a huge driver in that case. That would just fall into the box of some dusty room of, ‘Okay, yes, it got done, but it was not part of core strategy.’ So I think regulation is a driver but it must be accompanied by the demand side. I think they do play hand in hand, that is really what we see happening right now from a European perspective.

The investment community, whether it be the institutional side or the private wealth side, is increasingly asking about how to do this and how to integrate it. They are asking about new product development, and I think there is an important role for new product development in this space. There is a renewed interest, not just at the investment process side of either integration or thematic approaches, but on the outcome side. The more the sector moves towards figuring out the way to conduct impact assessments, outcome assessments and create a framing for comparison, the easier it will be for the HNWIs, institutional foundations and so forth to actually say, ‘I get it. There is my financial return, and now I have a way to compare my, for example, environmental return or my climate change return.’

Carlos Joly

Matt, do you see any movement afoot to tighten fiduciary laws and regulations to explicitly say it is negligence not to account for climate change or major environmental risks in investment decisions? So that the asset manager or the pension fund that does not take climate impacts into account becomes subject to the redress and compensatory claims that negligence leads to? This kind of regulatory approach is neither compliance-oriented nor command and control; it is more strategic. What it does is it really opens the space for innovative approaches, but the asset manager or pension fund are not off the hook.

Matt Christensen

The short answer is, no. The longer answer is that trends are moving in that direction. You can look at the stewardship code in this country and the corporate governance discussions that the commission is having about, ‘What is the actual role of investors?’ Because when they look at what happened in this crisis, one of the things they are keeping coming up with is, ‘Were these guys stewards? Were they actually acting on behalf of beneficiaries, or were they just doing a passive approach? Or if they were active, what did that actually mean? Are they voting in ways that show independence?’ So, I think they are doing it, but not exactly from that framework. However, they are going that way to reinvestigate how they create an investor class that takes on board that they actually have a certain role beyond what it is considered today. It might end up in that direction, but it has not started with that as the end goal.