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Sustainable investment set to grow as investors focus on climate

green investment, ESG strategy, responsible investment

Sustainable investment has improved its profile among asset owners and managers, indicating that further pressure to adapt to climate change is on the way for corporate boards.

Researchers spoke to 650 institutional investors around the world and reported that the proportion who “do not believe in” sustainable investment has fallen significantly over the past 12 months, from 18% in 2018 to just 11% this year.

While that may be good news for policymakers and campaigners concerned that investors put more pressure on companies to operate sustainably, the research from asset management firm Schroders also found that almost one in five investors globally (19%) do not place assets in sustainable investment funds. And this despite the avalanche of announcements from asset managers unveiling sustainability funds in recent times.

However, according to Jessica Ground, global head of stewardship at Schroders, the research shows that “even the most sceptical” of investment institutions now recognise the value of sustainable investment. She also said the trend was now global and no longer tied to specific regions. Further growth in sustainable investment can also be expected.

“The study emphasises that this only going to grow over the next five years with the likes of climate change now viewed by investors globally as the most important issue for stewardship engagement,” she said.

Among engagement topics, respondents revealed that climate change had become the most important (now rated the most important by 54% of respondents), eclipsing corporate strategy (53%) for the first time. This may be recognition that climate change has become a core part of strategy and for many companies will lead discussion on strategic direction.

An overwhelming number of investors believe sustainability to “play a greater role” over the next five years.

However, more European respondents—84%—were certain of this than in Asia Pacific, where the figure was 67%. That would concur with observations that market players in Far Eastern markets are still adjusting their thinking to the sustainability and climate change debate.

Challenges ahead

If investors are to continue the trend they will need better information and data, according to the survey. Globally, 76% of investors said sustainability investing was “challenging”, highlighting issues with a “lack of transparency reported data”.

There has been growing pressure on companies around the world to adopt the G20’s Task Force on Climate-related Financial Disclosures (TCFD) guidelines on reporting climate-related risk.

During a recent summit in Tokyo, Bank of England governor Mark Carney warned that companies that failed to adjust to a net-zero carbon emissions world would “cease to exist”.

He also warned that the financial system was not moving fast enough to integrate the climate crisis into investment decisions.

“Like virtually everything else in response to climate change, the development of a more sustainable financial system is not moving fast enough for the world to reach net zero.

“To bring climate risks and resilience into the heart of financial decision-making, climate disclosure must become comprehensive, climate risk management must be transformed, and investing for a two-degree world must go mainstream,” he said.

Meanwhile, a review of FTSE 100 annual reports found that just one in five companies mentioned the TCFD and only four “provided fulsome TCFD disclosures within their annual report”.

Just nine companies included climate change “within discussion of their strategy”. Only two of those “explained how their strategy is resilient to climate change”, though 57% of companies “explicitly referred” to climate change.

According to Veronica Poole, head of corporate reporting at advisory firm Deloitte, which was behind the review: “Businesses are facing increased scrutiny of their impact on people and the planet.

“The expectation of business is changing, and the licence to operate can no longer be taken for granted.”

The post Sustainable investment set to grow as investors focus on climate appeared first on Board Agenda.

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Big Four accountancy firms see decline in combined audit income growth

Big Four, PwC, Deloitte, EY, KPMG

The growth in audit fees for Big Four firms has fallen back significantly to one of its lowest levels since 2010.

Audit fees grew by 1.7% for Big Four firms combined—PwC, EY, Deloitte and KPMG—in 2017–18, compared with 5.7% the previous year, its highest rate of growth in the current decade.

In 2009–10, the year following the financial crisis, Big Four audit income shrank by 2.2% on the previous year.

The latest audit report on key trends in the accountancy profession from the Financial Reporting Council revealed how the UK audit profession has fared over the past year.

Audit and the audit profession has been under close scrutiny since the collapse of construction and outsourcing giant Carillion in January 2018. The government has since ordered a number of reviews looking at the audit market and audit regulation.

The latest report shows that the Big Four rely slightly less now on audit fees from publicly listed companies, even though they now undertake the audits of members of the FTSE 100 index. In 2018 audit fees from listed companies accounted for 19.4% of overall revenues. In 2007, a year before the financial crisis, the share was a quarter of all income.

The figures suggest that the Big Four may be going through an adjustment. Income from non-audit clients has risen to 72.1% of total fees, compared with 68.7% in 2016. In 2007 that figure stood at less than 60%.

Audit in the spotlight

Auditors have been under greater scrutiny since the financial crisis when many observers asked why they had failed to sound the alarm over finances in stricken banks.

The European Union placed the profession under a microscope with a new audit directive implemented in 2016. The directive introduced new reporting responsibilities for audit committees; mandatory audit firm rotation; and restrictions on the non-audit services that could be supplied to audit clients. There was also a cap on the non-audit fees that could be charged to audit clients.

The new rules prompted a movement by clients to new audit providers but witnessed little progress in encouraging new entrants to the audit market for large cap companies.

Further examination of audit followed the collapse of Carillion. The Kingman Review recommended the replacement of the Financial Reporting Council with a new body, the Audit, Reporting and Governance Authority (ARGA) with new powers.

However, Sir John Kingman, author of the report, recently complained that central government seems to have made no progress in pushing the new powers through parliament. Those powers could include ordering an evaluation of an audit committee or even the removal of an auditor.

Elsewhere, the Competition and Markets Authority looked at the audit market, recommending that audit be operationally split from other services. Government is still to legislate on those proposals.

Meanwhile, a further review, by Sir Donald Brydon, is looking at the quality and effectiveness of the audit process itself. He is expected to report later this year.

The post Big Four accountancy firms see decline in combined audit income growth appeared first on Board Agenda.

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New UK stewardship code puts focus on investor engagement

boardroom, board executives

Investor engagement with boards and companies is set to come under much closer scrutiny following the release of a new stewardship code by the UK’s watchdog for corporate reporting and governance.

The Financial Reporting Council (FRC) published the new code this week confirming, as expected, that it would place a much heavier emphasis on outputs rather than inputs: signatories to the code must report on their actual stewardship activities and their outcomes, rather than just their policies.

Recommendations to shift the emphasis of the code, or abolish it, were made a report last year by Sir John Kingman after he had reviewed the work of the FRC.

A statement from the FRC said the new code includes a requirement for investors to detail their activities and its outcomes “including their engagement”.

Perhaps more significantly, those following the code must also “take environment, social and governance factors, including climate change, into account”. The order is likely to trigger a fresh round of investigation as investors ensure they have measures in place to monitor these areas. Numerous indexes interrogate sustainability activity but the “social” in ESG has proved difficult to measure so far.

Sir Jon Thompson, chief executive of the FRC, called on investors to sign up to the newly revised code and warned investors they would be “held to account” on the quality of their reporting through “regular review”.

“Asset owners and beneficiaries will then be able to see if those investing on their behalf are doing so in accordance with their needs and views,” Sir Jon said.

“They will also be able to see the impact of their manager’s decisions, particularly in relation to environmental, social and governance issues, including climate change.”

The FRC’s chair, Simon Dingemans, called the revision “ambitious”. However, he emphasised that the code is still voluntary.

“We are looking for widespread adoption by the investment community, reinforcing the attractiveness of the UK as a place to do business and delivering real benefits to the economy, the environment and society.”

Integrated investment

The code’s Principle 7 captures the need for integrating ESG issues into investment decisions. It says: “Signatories systematically integrate stewardship and investment, including material environment, social and governance issues, and climate change, to fulfil their responsibilities.”

Principle 9 in the code covers the document’s significant new emphasis on the consequences of policy and contact with invest companies.

It says: “Signatories should describe the outcomes of engagement that is ongoing or had concluded in the preceding 12 months, undertaken directly or by others on their behalf.”

This might include how outcomes of engagement have affected investment decisions and the action taken by companies as a result of engagement.

The code has also been extended to cover asset owners, such as pension funds and insurance companies.

Those signed up to the code are also required to “explain their organisation’s purpose, investment beliefs, strategy and culture”. They must also demonstrate their purpose and beliefs through “appropriate governance, resourcing and staff incentives”.

The code is not only intended to address the behaviour of asset owners and managers but also responds to criticism of the FRC in a review of the regulator by Sir John Kingman, which also looked at its handling of stewardship. In his final report last year Sir John wrote: “The Stewardship Code, whilst a major and well-intentioned intervention, is not effective in practice.”

It was Sir John who recommended the code “focus on outcomes and effectiveness and not on policy statements”. He added the code should be abolished if it could not be reformed because it was acting as a “driver of boilerplate reporting”.

Sir John also proposed that government should consider whether more powers were need to “assess and promote compliance” with the code.

He asked that the FRC “engage at a more senior level in much wider an deeper dialogue with UK investors”. Sir John also recommended the abolition of the FRC and replacement with a new body, with new powers and funding arrangements to be called the Audit, Reporting and Governance Authority.

The post New UK stewardship code puts focus on investor engagement appeared first on Board Agenda.

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