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How much impact will COP26 have on UK retail investment?

Industry hopes conference ‘will be driving conversations in households across the country’

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The build-up to the 2021 United Nations Climate Change Conference (COP26) dragged on like the opening ceremony of an Olympic Games and ended in a 100-metre sprint.

The heightened buzz around the Glasgow-based event gave the world a chance to realise how much it needed to wake up to the dangers of climate change.

One of the key agreements came in extra time, after COP26 negotiations spilled into an additional day. It saw 197 countries make a heavily criticised deal to “phase down” rather than “phase out” coal – driven by last-minute demands from India and China.

Despite the copious media attention, many Brits have been left to piece together what the outcomes actually mean for them – especially retail investors.

International Adviser spoke to Quilter, Canada Life and Square Mile Research to discuss how much the agreements made at COP26 would impact the UK retail investment market.

Legacy

One thing is for certain, the long-term effects of the conference will not be seen for quite a while.

But whatever the legacy eventually turns out to be, not everyone in the here and now is happy with what was agreed in Scotland’s largest city.

Gemma Woodward, director of responsible investment at Quilter Cheviot, said: “The biggest thing to come out of COP26 which is likely to lead to the most substantial change is the pledge to halt deforestation by 2030. However, many will not see 2030 as ambitious enough.

“What we’ll need to see following this commitment at COP26 is clear delivery plans, realistic targets for nations to work to, reporting systems to be in place and enforcement mechanisms to exist for lack of action. Otherwise, this will simply remain a pledge, with nothing of substance behind it and it will have little tangible impact on retail investors.”

Shelley Greenwood, head of investment proposition, wealth at Canada Life, said that COP26 has “armed” investors with the knowledge that if no action on climate change is taken now, it will be a “potential detriment to our future”.

She said that investors “are more likely to consider the impact that they can have, both positively and negatively, depending on the decisions that they make”.

“They are not only considering their own immediate circumstances, but also those of future generations, their children, grandchildren, nieces and nephews,” Greenwood added. “We are all now even more acutely aware that the legacy we leave is not only financial and social, but also environmental and that this is critical to future prosperity.”

Products

COP26 may not only spark change in high net worth individuals. Investment companies have been on an ESG product launch frenzy for the past two years.

This data shown at the UN conference has meant that the ESG and green product push shows no sign of stopping – however, there needs to be thought behind the fund, rather than a rush to launch something that might not be quite right.

Steve Kenny, chief distribution officer at Square Mile Research, said: “We have already seen a number of launches of climate-focused funds over recent years and there are likely to be more given the huge focus on the need to mitigate the effects of climate change and its related impacts.

“However, although they may share a common naming protocol, they are all doing slightly different things, so it will be difficult for investors to compare like for like, something they must be aware of when trying to identify the most suitable product for them.”

Woodward added: “COP26 has put climate firmly at the top of the news agenda and this will likely influence investors in their investment decision making and therefore increase demand for products which are focused on climate. The challenge is ensuring that these products are clear about what they are delivering in terms of investment approach.”

Pensions

A product that needs more focus when it comes to ESG is pensions.

The institutional world and large pension funds woke up to the world of green and impact many years ago – but now is the time for private pension product providers to step up to the plate.

COP26 may have been the catalyst for this to happen.

Kenny said: “The concept of a sustainable pension may seem somewhat bizarre, and I can expect that an investor will want to understand the sustainable credentials of the platform or wrapper that they choose to save in.

“The term ESG is being mis-used in this sense, given that it is and can be an input into an investment process of any fund/ product, rather than something which produces a direct output.”

Canada Life’s Greenwood added: “It seems likely that ESG/sustainable focused pension products will be available in the near future.

“Investors already have plenty of investment solutions available that they can place their retirement funds into to support sustainable investment goals, the key will be to offer all-encompassing products considering carbon footprint and environmental impacts at every step of the customer journey.”

Regulation

The financial services industry needs to realise – whether they like it or not – regulatory change surrounding ESG is afoot.

Prior to COP26, HM Treasury and the Financial Conduct Authority (FCA) published details on the sustainability disclosure requirements that the financial services industry will need to abide by within the next couple of years.

Also, the UK government’s paper ‘Greening Finance: A Roadmap to Sustainable Investing’, building on the Green Finance Strategy, reiterates the need not only for change in finance, but the need for a common language and the importance of avoiding ‘greenwashing’.

Across the Channel, the EU has introduced the Sustainable Finance Disclosure Regulation (SFDR), a set of rules which aim to make the sustainability profile of funds more comparable and better understood by end-investors.

So, will more regulation be on the horizon due to the impact of COP26?

Greenwood said: “COP26 is likely to be an additional driver of regulation affecting retail investors and financial advisers. We have already seen a trend towards climate change and sustainability regulation across different regulatory frameworks. It reinforces the direction of travel to regulate to reduce carbon production and prevent climate change.”

Square Mile’s Kenny said: “I do not think that COP26 will lead to regulation in its own right. There are already wheels in motion from the FCA regarding climate disclosures, which come into effect in 2023. The concept of investing in a responsible manner is already well in train, COP26 adds further weight to the need for it.”

Demands

Governments can push the investment industry into change – and drive it towards greener and ESG heavy products and advice.

But, fundamentally, this may not necessarily be what the end-client actually wants. Surveys constantly and consistently state the younger generation wants it – but they will not be inheriting money for a long time.

The investment world’s push for ESG may be a waste of time if conferences like COP26 do not have the desired effect.

Quilter’s Woodward said: “Human nature dictates that people want definite solutions to a problem. Retail investors with their eye on the environment will, therefore, certainly want to see that the summit has made an meaningful impact that will help deliver for both the planet and their finances.”

Greenwood said: “It’s hard to say definitively whether COP26 has been influential for retail investors right now, however what it certainly has done is put climate change and how we as individuals can prevent that at the forefront of people’s minds.

“We saw rolling mainstream media news coverage of COP26 and so it is reasonable to expect the retail investors will be considering many aspects of their daily living; including how they choose to invest their money for their medium-term needs, and how this could affect themselves, their children and grandchildren over the long term and very long-term impact for the planet.

“We have also seen many young people galvanised to take action by COP26, and it’s likely that this will be driving conversations in households across the country. Hopefully the conversations at the dinner table will lead to more investors considering how that money can be used for social good as well as growth, and as such demand for environmentally positive investments will grow.”

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