The number of asset owners who feel the boom in ESG regulation is interfering with their ability to implement sustainability policies has more than halved over the past year. That’s according to a survey of 303 asset owners from across the globe, conducted by FTSE Russell.
“Fewer asset owners have indicated that sustainable investment regulations have impeded sustainable investment adoption,” the firm said in its findings, published on Thursday for the eighth year running.
In 2023, 29% of respondents said they considered regulation to be a barrier to pursuing sustainability in investment strategies. This year, the level tumbled to just 11%.
“The concerns identified last year on ESG regulation have now substantially subsided,” noted Stephanie Maier, FTSE’s new sustainability head, who joined this month from GAM Investments.
“As the pace of sustainable investment regulation continues, many more asset owners are investing in their resources and teams to navigate regulation,” she added.
According to the research, asset owners were happiest with Switzerland’s approach to sustainability regulation, with 73% saying they were either satisfied or very satisfied with the rules in the country.
Switzerland takes a ‘double materiality’ approach to its climate requirements, meaning companies and investors have to explain both their business’s impact on climate change, and climate change’s impact on their ability to do business.
The country’s rules are based largely on the recommendations of the Taskforce for Climate-related Financial Disclosures. Coming in just behind Switzerland was the European Union, whose regulation 72% of respondents said they were happy with.
The bloc has been the biggest champion of double materiality, and has a raft of complex ESG requirements, including the Sustainable Finance Disclosures Regulation, the green taxonomy, and labels for climate benchmarks.
The US and the UK, which are less advanced in their sustainable finance rulemaking, scored 67% on satisfaction.
Both take a ‘single materiality’ or ‘enterprise value’ approach to regulation, meaning they only require the disclosure of information directly related to entity-level financial performance, not environmental impact or contribution to systemic risks.
The vast majority (90%) of respondents to the survey said ESG regulation helped them at least a little bit in meeting their sustainable investment goals.
This was felt most strongly by asset owners with between $1bn and $10bn in assets, 100% of whom said it contributed “somewhat well”, “very well” or “extremely well”. The survey also showed that 17% of funds running less than $1bn, and 13% of those running more than $10bn, felt such regulation was not helpful.
Passive surpasses active for the first time
The survey also found sustainability to be most prevalent in passive investment strategies for the first time.
“This is the first year in our annual surveys where respondents have indicated that there is now more focus on sustainable investment in passive than in active strategies,” said FTSE Russell.
When asked “Where have you implemented or are you considering implementing sustainability considerations”, two thirds (66%) of respondents identified their passive strategies, compared with 61% for active.
Last year, the same question saw each option chosen by 73% of participants. In 2021 and 2022, the focus on sustainability in active strategies far outweighed that of passive, with 86% vs. 54%, and 84% vs. 58%, respectively.
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