Outlook: ‘2020 was an educational year – 2021 will be about the nitty gritty’

In the first of this two-part series exploring the 2021 outlook for the wider ESG industry, ESG Clarity looks at the regulations coming into force and their impact on greenwashing

Demand for ESG investing reached new highs in 2020 and this momentum is set to continue this year with more groups integrating responsible investment decisions into their processes and investors increasingly seeking to align portfolios with their core values.

Between January and October in 2020, £7.8bn was placed into responsible investment funds in the UK, according to trade body the Investment Association, which accounted for almost half of all net money placed into funds (47.5%).

Furthermore, this was four times higher than over the same period in 2019 and demonstrates a real shift in savers’ priorities, the trade body said.

See also: – Global sustainable fund assets leap to all-time high of above $1trn

ESG Clarity spoke to its editorial panel and other responsible investment commentators to find out their outlooks for 2021 and beyond with them all agreeing demand for these products and processes will not go away as Covid-19 has reinforced the need to ‘do the right thing’.

In this outlook series, we outline the key themes to look out for from an ESG perspective with below (part one) looking at regulation in Europe and the UK, and greenwashing.


Regulation is sure to be a key factor in the ESG world in 2021 with plenty of legislation coming into force that will mean asset managers, advisers and corporates will need to adapt from a responsible investment perspective.

As Curt Custard, CIO at Newton Investment Management, said: “2020 was an educational year where investors learned why ESG is important – 2021 will be more about the nitty gritty and putting ESG in to practise.”

However, with the UK now no longer a part of the European Union, there is still a lot of confusion on what asset managers and corporates need to consider.

“We are in a bit of a muddle over regulations”, commented Gemma Woodward, director of responsible investment at Quilter Cheviot and editorial panellist for ESG Clarity, as she pointed to ambiguity remaining around, among others, the Sustainable Finance Disclosure Regulation (SFDR) being put in place by the European Union (EU).

The SFDR imposes new transparency obligations and periodic reporting requirements on investment management firms at both a product and manager level. For the largest firms, this will mean extremely onerous new ESG disclosure requirements. 

Victoria Gillespie, head of ESG at INDOS Financial, further explained: “SFDR will require all asset managers to publish policies on their website outlining how sustainability risks are integrated into their investment decision making processes. Asset managers will also need to disclose – on a comply or explain basis – details about these policies and the potential adverse impacts of investment decisions on sustainability factors. The transparency requirements for investment firms managing ESG-focused products will need to be even more comprehensive.”

This would mean companies will need to “go from zero to 100 in 10 seconds in terms of the disclosure requirements,” said Woodward.

“It is great it is moving in the right direction but change happening too quickly is a risk,” she added. “There is a danger it becomes a tick box exercise and it loses its authenticity.

“It is vexing in that it is the right thing to do, but also it isn’t.”

There is also still uncertainty surrounding what companies will need to comply with in Europe as towards the end of 2020,  the European Commission parked some requirements: Level 1 – is still expected to come into effect in March 2021 but a second layer requiring much more detailed disclosures – called the Level 2 Regulatory Technical Standards – is likely to be postponed to the end of 2021 as there wasn’t enough time for a proper consultation and implementation by the first disclosure deadline of 10 March 2021.

See also: – How regulation can level the ESG playing field

Mikkel Bates, regulations manager at FE fundinfo and ESG Clarity editorial panellist, said: “Clearly, it would be unacceptable to put Level 1 date back. What we have instead is the high-level principles in the SFDR itself and no detailed prescription of exactly what needs to be disclosed, or how. Fund groups and others will need to post clear and concise information on their websites and in pre-contractual disclosures explaining how they integrate considerations of the principal adverse impacts of their investments into their investment processes.”

Furthermore, with the UK now outside the European Union, there remains uncertainty around what the UK’s version will look like.  

“The SFDR is coming into force in Europe but it is unclear what will happen in the UK,” said Woodward. “The government has said there will be an equivalent, but we are still not sure what that will look like exactly.”.

Bates added: “Of course, for UK-domiciled funds, the issue of Brexit has negated the SFDR entirely. The government has said that following the end of the transition period this year, SFDR will not apply in the UK, with the FCA due to consult in the first half of 2021 on reporting in line with proposals in the Task Force on Climate-related Financial Disclosures (TCFD) report and roadmap published in November 2020. This covers the period from 2021 to 2025 and sets out a phased approach for the introduction of mandatory TCFD-aligned disclosures for UK listed companies, pension schemes, banks, building societies, asset managers, life insurers and FCA-regulated pension providers.


In November, Chancellor Rishi Sunak announced the UK will be the first country in the world to make Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosures mandatory.

At the time, Saker Nusseibeh, CEO at the international business of Federated Hermes, said: “Requiring UK companies to make mandatory disclosures against the TCFD framework will move discussions from the ‘whether’ to the ‘what’ and ‘how to’ stage: this is an extremely positive development.”

With varying rules across jurisdictions creating confusion, Newton’s Custard said it would be a positive to see some consistency. “There are changes in regulatory frameworks coming up and the data requirements to satisfy those regulatory changes,” he said.

“It would be good to see regulatory collaboration across jurisdictions – Brexit means the UK may have different standards to the EU but within that the Belgians and the French have different standards. That’s another burden on asset managers distribution across these regions to meet all those different requirements.”

This is a sentiment Bates agreed with but also suggested companies shouldn’t simply wait to be legislated on disclosure: “Groups with UK and EU-based businesses will be hoping that HM Treasury sticks to its goal to match the ambition of the EU Regulation and there is commonality between the two reporting regimes. In the meantime, there is nothing to stop those companies going beyond what is required of them and making sustainability disclosures before they need to.


For advisers, new regulations coming into force under MiFID II in March 2021 will be a key change for the year. It states advisers will be required to consider environmental sustainability in the advice process. Meanwhile, the Financial Conduct Authority (FCA) is set to follow suit and announce changes to Conduct of Business Sourcebook (CoBS) to align the UK rules to Europe requiring advisers to ask clients about their sustainable investing preferences – they must tell clients to consider sustainable investing risk and to offer a responsible investment portfolio option.

Jim Wood-Smith, CIO private clients and head of research at Hawksmoor Investment Management, said this will compel every adviser to “have ESG as a core part of their client fact-finding and suitability processes, and also to be part of their available investment solutions”.

“It is very much for the better and is a move that should be embraced rather than feared. The regulation is all about achieving better client outcome, which must logically be the result of better engagement with clients.”

US efforts

Across the pond, with Joe Biden elected as the new US President we can also be sure to see new laws encouraging a transition to a more sustainable economy and society – at least a considerably notch higher than his predecessor Donald Trump.

Eoin Murray, head of investment at the international business of Federated Hermes, explained: “With US President-elect Biden having promised to re-join the Paris climate agreement on his first day in office, shift in US policy will be a significant boost to global climate policy efforts and will set up 2021 for further progress. Biden is also proposing a US net-zero carbon emissions target for 2050, leaving India and Brazil among the 10 largest global economies still to set such a target.

“This turnaround sets the stage for an accelerated global effort to combat climate change at a time when record-breaking heat, wildfires and hurricanes are battering our planet. As a result, the chances of meaningful outcomes from the rearranged COP26 in Glasgow next year have significantly improved.”

UK Stewardship Code

In the UK, companies will also need to get to grips with the new UK Corporate Governance Code, which comes into effect this month (January).

The UK Stewardship Code 2020 is a set of 12 principles for asset owners and managers, which took effect on 1 January 2020, to ensure they are meeting expectations on how they are managing money on behalf of savers and pensioners and how this leads to sustainable benefits for the economy, the environment and society. An early review of annual reports submitted to the Financial Reporting Council (FRC) showed encouraging signs of effective stewardship even amid the backdrop of Covid-19 but there remains room for improvement.

In the report The UK Stewardship Code: Review of Early Reporting September 2020, the FRC said some groups did not respond to all 12 principles, and most did not cover all the reporting expectations that sit underneath.

“In cases where there is a strong reason why a reporting expectation does not apply, applicants should explain this reason, rather than simply ignore it in their disclosure.”

The FRC also said reporting needs to improve by reflecting on “effectiveness of approach, demonstrating continuous improvement and disclosing outcomes”.

Further regulatory announcements

As the industry evolves and the need for companies to improve their data and reporting around responsible investing, even further regulation could emerge next year.

See also: – Data goldrush: Abundance of ESG data does not mean better information

“2021 will also be the year global financial regulators and voluntary standard setters converge around concrete measures to improve data quality and coverage – not just on climate but on wider environmental and social factors,” said Federated Hermes Murray. “This will help investors overcome the barrier to access of better reporting on impact and the use of comparable decision-useful data. I would also anticipate seeing some further regulation emerge from the Biodiversity COP 15 being held in China in March.”

Barclays Private Bank’s head of sustainable and impact investing, Damian Payiatakis agreed there is likely to be further regulation announced as the world is still so far behind in tackling climate change.

The likely regulations that will have the most impact on responsible investment field will be a result of new governmental commitments to address climate breakdown. As noted by Climate Action Tracker, current policy plans and actions do not achieve the 2°C commitment, let alone 1.5°C target. Therefore, we should expect further industry regulatory changes across a variety of sectors and issues such as energy production and usage, resource efficiency, waste or biodiversity.

“As these new corporate requirements are announced and implemented, responsible investors who have successfully identified the associated risks and opportunities in their client portfolios will be best positioned for these changes.”


There is a lot to take in in terms of 2021 regulation, but the responsible investment industry have welcomed this increased scrutiny tin order to weed out the greenwashers.

Therese Niklasson, global head of ESG at Ninety One said: “The positives of the regulation is that it will be a much needed charge against greenwashing. We have seen launches and promotions of funds are not necessarily green and the new regulation should flush that out.

Meanwhile, Federated Hermes’ Murray added: “The pushback against greenwashing will continue with regulators paying closer and closer attention, not only to how investors are integrating sustainability into investment decisions, but in progressive jurisdictions, how sustainable investors are delivering positive impact as a result of their actions.

“However, investors must remain wary of ESG platitudes and greenwashing, while identifying true affirmative action from companies which solve societal issues in a practical and meaningful way.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...