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Transition planning in investment management

Measures and opportunities for Investment Managers to move from commitments to action

Authors:

Tom Renders: Global Investment Management Sustainability Leader, A&A: Sustainability & Emerging Assurance, Deloitte Belgium
Don Gerritsen: EMEA Investment Management Sustainability Leader, SRTA, Deloitte Netherlands
Thijs van der Plas: Manager, STRA: Sustainability for Financial Institutions, Deloitte Belgium
Michiel Smeenk: Manager, T&T: Engineering, AI & Data, Deloitte Netherlands

 

Performance Magazine Issue 46 - Article 4

To the point

The sustainable investing space is shifting from ambition setting to the development and implementation of actionable transition plans, with new EU regulations providing an outline of the expected components of a climate transition plan, such as specific and timebound targets, a clear governance and integration in financial planning.

Developing and implementing transition plans is complex, but also provides opportunities to investment managers by integrating environmental risks, meeting stakeholder expectations, generating data-driven insights based on new disclosures and setting decarbonisation strategies.

Based on Deloitte’s Sustainable Investor Framework1, we have defined an approach for Investment managers to develop and implement transition plans.

Introduction


Over the past 15 years, sustainable investing space has evolved from mainly focusing on marketing and communication to incorporating sustainability in strategy development and setting goals, with many investment managers aiming for targets such as Net Zero2.

The focus is now shifting to regulation, implementation, and impact measurement3. However, in a changing political environment, investment managers struggle to integrate environmental and climate risks into their businesses amidst legal fluctuations and reputational concerns. As climate change and related economic impacts become more evident, investment managers must move from planning to action by embedding sustainability in investment strategies, and complying with complex regulations.

Organizations will need to implement robust, comprehensive, and practical transition plans to remain competitive and adapt to these sustainability challenges. The investment community values these plans for their holistic approach, aligning ambition, risk management, capital allocation, and long-term strategy. Key opportunities include creating frameworks that integrate financial and ESG metrics, promoting sustainable finance, and enhancing global competitiveness.

The European Commission (EC) has adopted proposals to align the EU's climate, energy, transportation, and taxation policies to reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels4. Key objectives include:

  • Becoming the first climate neutral continent: no net emissions of greenhouse gases by 2050;
  • Maintaining and strengthening innovation and competitiveness of EU industry;
  • Decoupling economic growth from resource use, and
  • Ensuring a just and socially fair transition.

As part of the European Green Deal, the EC has pledged to mobilize at least €1 trillion in sustainable investments over the next decade. EU green bonds and increased public and private investment5 will provide further support. The share of funds handled by the financial services industry that is contributing or linked to climate-related goals is expected has risen significantly over the past years and expected to increase further.

While the EU aims to guide the climate transition of the financial sector and the broader economy, many firms have yet aligned with these ambitions.

Regulatory perspective: Shift from disclosures and transparency to a requirement to take action


European financial institutions, especially banks, are facing increasing regulatory and supervisory pressure to align with the EU’s desired climate pathway. According to the European Central Bank, “failing to plan is planning to fail’’ and “the misalignment with the EU climate transition pathway can lead to material financial, legal and reputational risks for banks.”6 But what are the risks and current and future requirements for Investment Management companies?

A single, comprehensive framework for transition planning for European financial institutions does not exist yet. Most existing legislation focuses on disclosures and transparency. The Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy are all legislations aimed at increasing transparency in sustainability matters. Both SFDR and CSRD impose mandatory disclosure requirements –SFDR for financial market participants and financial advisers, CSRD for large corporations, including financial institutions.

The EU taxonomy provides transparency and directs investments in sustainable finance by classifying activities that contribute to the EU’s environmental objectives, such as climate change mitigation and adaptation, sustainable resource use, or transition to a more circular economy.

The first EU regulation requiring companies to act on transition planning is the Corporate Sustainability Due Diligence Directive (CSDDD)7. The main objective is to ensure companies perform due diligence to prevent adverse environmental and human rights impact across a company’s chain of activities. It also requires in-scope companies to adopt a transition plan aligned with the Paris Agreement’s goal of achieving climate neutrality by 2050 (max 1.5C global warming by 2050).

  • Clear time-bound climate change targets for 2030 and every five years up to 2050, based on scientific evidence, with absolute emission reduction targets for scope 1, scope 2 and scope 3 greenhouse gas emissions for each significant category.
    • For financial institutions, the most notable category of GHG emissions is usually Scope 3, category 15, as defined by the GHG Protocol, covering direct and managed investments, and client services.
  • A clear description of decarbonisation levers and key actions planned to reach the targets, including actions related to product and service offerings.
  • A quantification of the investments and funding supporting the implementation of the transition plan for climate change mitigation.
  • A description of the internal governance relating to the transition plan, including roles of management and supervisory bodies.

While the EU Omnibus will simplify these requirements, the initial proposals still require companies to adopt a climate transition plan including implementing actions. This includes alignment of their business model and strategy with the transition to a sustainable economy and limit of global warming to 1.5C, in line with the Paris Agreement.

Before CSDDD, companies voluntarily created transition plans. However, with the phased implementation of CSDDD, this will become mandatory. Some leading companies have already begun taking initial steps in to comply.

However, creating transition plans is complex and multidimensional. Companies with existing transition plans see them as initial drafts that will improve as regulatory expectations and supervisory requirements become clearer and data quality improves with required disclosures.

For financial sector, transition planning is challenging due to a lack of high-quality data availability and unclear EU sustainability regulations. It is not always clear what should be included in a company’s transition plan or which activities are considered sustainable.

However, investment managers have a lot to gain. With evolving market expectations and regulations, there’s a growing demand for solid transition plans. Investment managers need to incorporate climate-related financial risks and opportunities in their portfolio as strategies, measure their direct climate impact and ensure regulatory compliance. Successfully navigating this complex landscape, transition plans can:

  1. Reduce the overall risk of your portfolio by including environmental financial risks.
  2. Help investment managers meet stakeholder expectations, as new regulations increase demands from various stakeholders, including asset owners.
  3. Quantify the financial impact of environmental factors and support data-driven decisions using new data from investee companies.
  4. Develop new products and strategies focusing on decarbonization, leveraging industries’ transition plans, offering new technologies, or shifting geographic focus.
  5. Provide investors insight into with an investment manager’s sustainability perspective, priorities, and strategy.
  6. Highlight a firms’ positive impact and contributions to society.

Taking action: How to develop and implement a transition plan


In line with Deloitte’s Sustainable Investor Framework, we’ve outlined steps for investment managers to develop and implement transition plans:

  • Strategize: Define the scope of your transition plan for your portfolio and operations, set your ambition level, and consider relevant regulatory requirements.
  • Plan: Assess your status quo, identify decarbonization strategies per asset class, and review your internal setup, ensuring data availability, reporting tools. and dashboards.
  • Act: Implement and execute your decarbonization levers across your portfolio, adjust investment processes, engage with portfolio companies, and integrate your transition plan into governance and future planning.
  • Report: Track your progress and impact per asset class and decarbonization levers, set clear KPIs, and include the transition plan progress reporting in your established reporting process.
  • Evaluate and iterate: Compare outcomes with initial targets, identify effective decarbonization strategies, enhance your action plan and internal processes, and restart the cycle.

In 2023, foreign investment surged in India, flowing in from a variety of jurisdictions. The year also saw a spate of regulatory developments that underscored India’s unwavering commitment to fostering economic growth, streamlining investment processes, enhancing transparency, and nurturing a favorable environment for foreign investors.

As the global economy continues to intertwine with India’s financial markets, it’s increasingly essential for foreign investors to understand the country’s regulatory framework and keep abreast of its changes.

This article summarizes the different routes available to foreign investors, taking a closer look at the regulations governing foreign portfolio investments (FPIs) and alternative investment funds (AIFs) in India. It also breaks down the Securities and Exchange Board of India’s (SEBI) rules and compliance requirements for these avenues.

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