In this episode of the Sustainable Finance Guernsey channel, our
host, Brandon Ashplant, speaks to James Hay, Principal Climate and
Sustainability Advisor of Pinsent Masons.
The conversation explores the complexities of transition planning
and transition finance in asset management. He discussed the focus
on financed emissions and the challenges asset managers face in
developing effective decarbonisation plans. James highlights the
distinction between operational emissions and financed emissions,
and discusses the practice of 'paper decarbonisation' where
asset managers shift investments without impacting real-world
emissions.
Transcript below:
Brandon (00:00)
Hello and welcome to the latest episode of the Sustainable Finance
Guernsey podcast, rated one of the top 10 most useful sustainable
finance podcasts by Green Finance Guide. Guernsey is one of the
jurisdictions leading the way in green and sustainable finance. And
as part of this podcast series, we will be speaking to and learning
from some of the leading global figures in the field.
My name is Brandon Ashplant, and I'm Technical Manager of funds
and private wealth here at Guernsey Finance, the island's
promotional agency for the financial services sector. Today I'm
talking to James Hay of Pinsent Masons. James advises financial
services firms and corporates on a broad range of sustainability
matters with a focus on complex ESG regulatory change, including
sustainable finance disclosures, corporate sustainability reporting
and net zero transition planning. At Pinsent Masons, a
multinational law firm with a reputation for delivering
high-quality legal advice rooted in its deep understanding of the
sectors and geographies in which their clients operate. So without
further ado, welcome, James. It's great to have you on the
show.
James Hay (Pinsent Masons) (01:16)
It's a pleasure to be Thank you.
Brandon (01:18)
Can we begin with you telling me a bit about yourself, how you came
to work for Pinsent and Masons and in the sort of climate and
sustainability team in particular?
James Hay (Pinsent Masons) (01:30)
Certainly. So I had an interesting career journey up to this point,
maybe as a typical millennial. I actually began my career as a
corporate lawyer in Hong Kong. But I became interested in
sustainable finance and investments quite early on to my career and
actually was undertaking the CFA program at the same time as being
a legal trainee, which was quite a challenge.
So after qualifying as a corporate lawyer in Hong Kong, I did my
MBA at INSEAD, and then I joined a sustainable investment firm
called Main Street Partners in London. That's really where I
got the bulk of my experience in this field. And then, after about
five years or so, Main Street was acquired by a company called All
Funds. And at that point, I decided to move over to the consulting
side of things where I joined the new financial services ESG
consulting team at KPMG. Two years later, I decided to join Pinsent
Masons and really the decision was to combine the legal expertise
that Pinsent Masons has with the consulting expertise that I was
gaining at KPMG to bring it together into really a combined
offering. And that's been, I suppose, quite a powerful offering
and really distinguished in the market because often those two
things don't go together. And so it's great to provide our
clients with that holistic advice.
So that's been quite a compelling proposition for our clients
over the last two years.
Brandon (02:53)
So, as an advisor on climate and sustainability, how has the
landscape of projects and advice you have been working with clients
changed over the last five years or so?
James Hay (Pinsent Masons) (03:07)
That's right. So this field is changing so often. In fact, I
feel like it changes every 12 months or so. And this is really as
we process new regulations that have been coming in and also
understanding the changing business environment as a result of
political change or as a result of new risks emerging. Now, for the
past five years or so, the majority of our work has been regulatory
driven. And that's really because governments implemented a
constant pipeline of new regulations.
I suppose that's really what's been responsible for all the
acronyms in ESG, because it just had so many regulations to handle.
However, there's definitely been a bit of a change recently.
That was predominantly driven by the EU slamming the brakes on some
new sustainability regulations following the European parliamentary
elections in 2024, when the centre-right coalition gained a
majority. They favoured policies promoting international
competitiveness over sustainability.
Also, of course, we've had political developments in the US as
well. And even in the UK, we've seen governments changing and
also potentially backpedalling on some sustainability ambitions
while continuing to drive forward some others. So in the EU, where
I suppose the majority of these regulations were coming out from,
this triggered the omnibus simplification process. And this is
still ongoing. So there's a lot of change at present as
well.
And essentially this omnibus is a negotiation between the European
Commission, the European Council and European Parliament over how
much to scale back sustainability regulations and promote
international competitiveness. Now these tripartite negotiations,
as you can imagine, are very complicated. And this is why
there's been so much policy change over the year. And
that's caused a lot of apprehension among business because what
they really like is, of course, so, you know, with this potential
pause in the regulatory pipeline, companies are now really looking
beyond mere regulatory compliance, and they're now thinking
more about sustainability risks, not just in their operations
themselves, but also in their supply chains. You know, as I say,
things change every 12 months or so, and I think this year a lot of
companies have been focusing much more on the risks in their supply
chains.
Brandon (05:24)
It would be great to talk about the transition planning and
transition finance a little bit more. Could you start by just
explaining what transition finance means in practice and how it
differs from traditional routes of green finance?
James Hay (Pinsent Masons) (05:46)
Certainly. So look, people in sustainability may disagree over
definition of transition finance, but I'll try and provide a
broad view so you can drill down a bit. So essentially, transition
finance is about providing capital to activities which support that
transition to a low-carbon economy. And so we can also use the term
transition investments to mean something similar in the context of
investing. However, the point of using this term transition finance
rather than say, green finance or maybe sustainable finance is
really to distinguish activities which achieve that transition aim,
which are not typically considered green. So sometimes people might
refer to green finance as brown to green and transition finance
maybe is brown to lighter brown. But there's really a broad
spectrum there, which is why you can get those disagreements.
Brandon (06:41)
And it's great to understand the difference between transition
finance and green finance. What about transition planning? Where
does that fit in?
James Hay (Pinsent Masons) (06:52)
Certainly. So when we think about transition planning, this is
going beyond thinking about pure activities, such as renewable
energy, thinking more about how entire companies are transitioning.
So thinking more on the of the narrow side of things. For example,
the financing of renewable energy could be considered green,
whereas the financing of natural gas, a fire power plant would not
be green, but could be transitioned, where actually it would be
potentially constructed to replace a coal fire power plant. And
then that would potentially meet that definition of transition
finance, depending on how strict your parameters are. But now if we
expand that concept, we can think about the financing or the
investment into companies whose core business is not necessarily
green but they are seeking to decarbonize and make themselves more
sustainable. And that's really where that broader idea of
transition planning comes into effect.
Brandon (07:51)
Are there emerging principles or standards that asset managers
should be more aware of?
James Hay (Pinsent Masons) (08:00)
Yeah, so there are a lot of standards when it comes to transition
planning. A lot of guidance documents have been published over the
recent years. So I think probably one of the most important at the
moment actually has been the Transition Finance Market Review in
the UK. And they published a long report in October 2024. And that
really set out the current market practice and also general
understanding of transition finance.
However, there have been a number of other publications from international coalitions like GFANS, like the ISSB, etc. So there's quite a lot out there. But for anyone who's really interested in digging into all these different guidance documents, the Transition Finance Market Review paper actually contains a lot of those. And so it's a really good resource, to conduct further research.
Brandon (08:54)
What are some of the factors that are leading to firms you're
working with in taking transition planning a bit more
seriously?
James Hay (Pinsent Masons) (09:03)
Yeah, so there are several drivers for this. So the first is that
many companies, both financial services firms, as well as
corporates, have previously announced net zero targets. So
transition planning essentially is the process of figuring out how
they're going to achieve those targets. The second driver
really is stakeholder pressure, such as investors wanting listed
companies to publish transition plan or government procurement
policies requiring suppliers to have such plans.
And this can also include banks or investors wanting to see a
transition plan before they lend to or invest in the company. So
we're at quite an early stage when it comes to that stakeholder
pressure. Certainly, the banks I've spoken to, they're
interested in learning how they can engage their borrowers on their
transition plans, but they're not quite at that stage of
remaking it a requirement of their lending. And then the third
driver is regulatory compliance. So both the EU and the UK, are
currently introducing regulations which may require large companies
to publish transition plans, albeit the caveat there of course is
these current negotiations that are ongoing. And there was a
consultation earlier this year published in the UK about really how
ambitious the UK should be when it comes to mandating transition
plans. So this was one of the key challenges for companies,
particularly those that have set net zero targets, is understanding
actually how difficult it can be to achieve those net zero targets
and what that really means in practice. And this is why I think,
you know, governments regulators are really having a deeper think
about what should be mandatory under regulation, whether a 1.5
degrees target is mandatory, whether it's mandatory for
companies actually to publish and implement these plans or merely
to set their ambition and describe how they're going to achieve
it.
So for me as a consultant, that's really the core of my advice
is actually the practicality of achieving those targets and what
that will mean for business strategy.
Brandon (11:04)
And how can the asset management industry, more specifically, look
at transition planning and finance?
James Hay (Pinsent Masons) (11:14)
So when asset managers think about transition planning, they need
to think about their own business activities, but they also need to
be thinking about the transition plans of the companies in which
they invest. And in reality, those two aspects are linked. So the
carbon emissions associated with an asset manager's operations,
such as its office facilities or business travel, are really a
fraction. I mean, less than 1% of their overall emissions. 99% of
an asset managers' emissions come from their finance
activities, the investments they are making. So this means when an
asset manager is setting a net zero target, yes, they should have
an ambition to reduce their own operational emissions, but really
they're thinking about how to reduce those financed emissions.
But therein lies the challenge, of course, because asset managers,
particularly in listed markets, they don't have control over
their investments, so they can't force management to set
decarbonisation plans. What typically happens instead is that asset
managers may sell some of their more carbon-intensive investments
and reinvest in less carbon-intensive investments. This will reduce
their financed emissions, but really that won't change any
emissions in the real economy. And as a result, this practice has
been known or referred to as paper decarbonisation, where they
reduce their emissions that they report in their periodic
disclosures.
You know, when we think about this, if an asset manager is really
committed to net zero, they need to come up with a transition
strategy. And I focus on four key strategic pillars for this. The
first essentially is what funds they are launching or mandates they
are managing. And I refer to that as their product strategy.
Secondly, how are they thinking about climate risks? How do they
integrate climate considerations into the investment process? And
so I refer to that as their investment strategy.
Thirdly, how do they engage with their investing companies and vote
their shares? So I refer to that as their stewardship strategy. And
then fourthly, how they seek to mitigate their own operational
emissions, albeit a small fraction of their overall emissions. So I
refer to that as their operational strategy. And so by breaking it
down in this way, rather than focusing on purely that
decarbonisation number, I think asset managers can understand how
their business strategy informs and influences their transition
strategy because the mistake I think that some asset managers make
is they're looking to achieve a certain decarbonisation
objective without understanding actually how they are dependent on
their business strategy. Are they an active management house? Are
they a passive management house? Are they managing mandates? Are
they distributing funds to the market? So there are many different
kinds of business strategies that asset managers can lead and that
will really dictate what they can achieve in their transition
strategy.
Brandon (14:09)
Looking at the asset management industry then, what is the current
status of sort of mandatory climate reporting and how do you see
this sort of simplification versus deregulation narrative around
climate reporting impacting firms?
James Hay (Pinsent Masons) (14:27)
So right now, and I'll focus on the UK just because it's
going to change significantly by jurisdiction, but in the UK at
least, we have climate risk reporting. So some people might know
this as TCFD reporting, and that stands for the Task Force for
Climate Related Financial Disclosures, where the UK regulator said,
we would like asset managers basically to disclose climate risk and
how it's integrated into their investment strategy in
accordance with the TCFD recommendations.
However, we're now thinking about your mandatory transition plans and there's both constellations that I mentioned earlier that was led by the government about how large companies in general should disclose transition plans. But the FCA in due course will also consult on mandatory transition plans for the financial services sector, including asset managers as well. So these transition plans for asset management firms are not yet mandatory, although they're to a certain extent, some of the TCFT recommendations do suggest disclosing how you are thinking about climate risk in your business strategy, and that might then lead on to transition planning-related disclosures. But it's not quite the same as complying, for example, with UK Transition Plan Task Force disclosure framework, which really go much further beyond the TCFT recommendations.
Brandon (15:46)
How do you see the now increasingly sort of mandatory reporting
driving or drive towards that, know, changing behaviour for firms?
You know, is that happening yet?
James Hay (Pinsent Masons) (15:58)
Yeah, so I think having mandatory reporting has created more
consistent practice across the industry. Beforehand, a number of
firms were producing disclosures, particularly in their marketing
material to investors, while some other firms were silent on
climate risk and their metrics. So it certainly established a
minimum level of disclosure, which is helpful. However, I think
even some of the regulatory disclosures go beyond perhaps what
retail investors or consumers might really be able to understand.
So a lot of disclosures, I think, are potentially more useful for
institutional investors, but they might also typically have their
own RFP questions or their own due diligence requirements that go
above and beyond the regulatory disclosures as well. So it
certainly has been useful, I think, to create more standard
disclosure practice across the industry versus just really the wide
range that we saw beforehand.
Brandon (16:55)
And if not reporting, what is driving, you know, behaviour
change?
James Hay (Pinsent Masons) (17:01)
So I think political developments around the world are also
driving change among asset managers. Certainly in the US, there has
been a market change in practice where ESG disclosures really are
having to be stripped out of marketing materials. So you almost
have US-facing disclosures and European-facing disclosures, which
can be really quite a challenge for asset managers. I think
we're also seeing firms thinking about their products, whether
they are actually sustainable investment products or if they're
more traditional funds. And whereas I think we had seen a number of
firms really disclose sustainability-related information across all
of their funds. What I'm starting to see, this is still quite
early days, is that they're focusing on the disclosures for
their sustainable funds now and for their traditional funds. Maybe
they are stripping some of that back to comply with regulatory
requirements because those investors are focusing more on the
financial risk and return characteristics of the fund rather than
all the sustainability disclosures. Not to mention of course that
producing these disclosures can be expensive. It does require a lot
of time and resources at firms.
Brandon (18:13)
And to what extent is managing risks and opportunities around
climate and sustainability understood to be as a core part of firms
fiduciary duties across the different types of institutional
investors, such as pension trustees.
James Hay (Pinsent Masons) (18:32)
So we can think about fiduciary duties when it comes to climate
change and sustainability, I suppose, at each layer of the
investment chain. So let's start at the bottom. Let's think
about your corporates, your companies that are being invested in.
So whether company directors have a fiduciary duty to consider
sustainability obviously will depend on local law. But in the UK,
at least, directors are required to consider it. But it's
debatable whether it's really a positive duty to integrate
sustainability into business strategy. In essence, that's
because UK courts are very reluctant to second-guess how directors
run companies. Nonetheless, of course, you may have particularly
ambitious individuals as directors, and so they are driving the
integration of sustainability into business strategy. Or you may
have company management who really believe, of course, that
integrating sustainability is good business. And that certainly has
been a key message for many years now. Now, moving up the
investment chain, asset managers have a fiduciary duty to act in
the best interest of their investors. And of course, this will also
include taking into account financial material risks, which can
include sustainability risks. But what this would not include, for
example, would be a positive duty to target certain sustainability
outcomes unless this is expressly set out in the investment
mandate.
And you might commonly see that in sustainable or impact investment funds where they really aiming to achieve certain impact outcomes. Now, I think where this discussion gets really interesting is when we think about asset owners and more specifically, pension funds at the top of that investment chain. Yes, the question is, do pension funds have a duty to invest sustainably? Now, this has become an increasingly important topic recently because pension funds are debating whether to divest from fossil fuel companies, whether to increase investment now in defence, which previously was seen as something that's not particularly sustainable. And also something that can be a bit of a political hot potato, like excluding companies associated with the ongoing events in Gaza. Now, in the UK, the law does permit pension trustees to take sustainability considerations into account. I think that word permit is quite useful because there are limitations here, and it's not, again, a positive duty to take such considerations into account. So if you think about the purpose of pension fund, its primary purpose is to provide their beneficiaries with retirement benefits. So essentially, where the law permits trustees to take sustainability into account is where adopting a sustainable investment approach would not negatively conflict with that purpose. So, for example, where it might improve the risk-return profile of their investments, but at the very minimum, not be to its financial detriment. So there are really two potential avenues for that financial detriment test. And the first is whether adopting a sustainable investment approach would result in worse risk-adjusted returns. For example, if sustainable investments were expected to underperform. The second avenue is thinking about diversification benefits. If you overly exclude certain sectors because you think they are not sustainable, then that might reduce those diversification benefits. And suppose actually a third avenue, which maybe is less related to the investments themselves, but it's more of an operational issue. What is the operational cost of adopting a sustainable investment approach? For example, it may require pension funds to invest in higher-cost products. Some of these ESG funds do come with higher management fees.
Additionally, if you are currently invested in a pooled vehicle that does not take a sustainable investment approach, you might have to segregate your assets out from that pooled vehicle. And again, that will actually incur additional costs. So these are much more practical costs, but they really do need to be considered by trustees because at the end of the day, even if the risk profile of the investments is not impacted, unless you can really point to some positive return, it'll be hard to justify those higher operational costs right now at Pinsent Masons, we are advising pension trustees on these issues and helping them to comply with fiduciary duties, thinking about these, some these quite tricky questions.
Brandon (23:04)
Is divestment part of the process?
James Hay (Pinsent Masons) (23:06)
Yes, so some pension funds in the UK have decided to divest from
certain companies. An easy example might be fossil fuel companies,
specifically coal mining as well. And this is because they think
that such companies essentially have a limited life, right? That
they might be stranded assets and not viable in the future. So
they're looking to sell them now to avoid taking a write-down
in the future.
However, there are some pension funds which have also taken some
divestment decisions, where maybe it's not driven so much by
the financial risk-return profile, but maybe more by political
considerations. For example, defence companies, companies involved
in the events in Gaza, et cetera. So it's a bit more of a
challenging decision to reach because again, you've got to
justify why taking those decisions does not result in financial
detriment to the fund. But where you're excluding a small
number of companies, then the loss and the diversification benefits
will not be significant.
Brandon (24:11)
And how much is climate litigation considered a risk for
directors?
James Hay (Pinsent Masons) (24:19)
So again, we can think about those three different layers of the
investment chain. So I think climate litigation is quite important
for corporates, potentially particularly for corporates which have
high emissions profiles. We have seen new cases making their way
through the courts trying to impose a liability on companies for
their historic emissions. So, for example, fossil fuel companies
because they have a large emissions profile. They are a potential
target for such litigation. There could also be litigation brought
against asset managers for not adequately considering
sustainability risks that are financial material in their
investment activities. And again, really the same pension trustees,
while there's no positive obligation to consider sustainability
in the investment approach, there is a requirement to think about
financial material risks.
Pension trustees are not properly thinking about this, or they just
outright refuse to consider sustainability; then yes, there might
be grounds for potential legal action. So, climate litigation is
becoming more of a risk because we're really seeing novel
lawsuits being brought that are really testing the boundaries of
law. And climate litigants have seen some successes. They've
seen some setbacks as well. So, because this is an evolving space,
think it is something that directors really should be thinking
about more carefully.
Brandon (25:46)
And just finally, we have seen growing interest and political
commitments to invest more in defence, particularly across Europe
in the last few years. How is this impacting investment in
sustainability and how is this being viewed, I guess, through a
sustainability lens?
James Hay (Pinsent Masons) (26:08)
Yeah, so the complete 180 on defence investments over the past
couple of years has been really interesting to see. You know, look,
I think it's fair to be a little bit cynical about it, because
as soon as defence became a political priority, the sustainability
justifications for defence were published swiftly thereafter. So,
look, the sustainability case for defence investments is the social
benefit through the support of international peace.
Importantly, this is also linked to the United Nations Sustainable
Development Goal number 16, which calls for peace and justice. Now,
divestment campaigns in relation to companies involved in defence
activities have been around for many years, and particularly more
recently as well. Now, I think this has caused pension funds to be
stuck in a bit of a difficult situation as they seek to benefit
from the tailwind behind defence investments, while also being
petitioned by some very loud and activist campaign groups, calling
for them to divest from such companies for political or other
reasons. And again, think given this difficult situation for
pension funds and their fiduciary duty free duties, this really
does underline the importance of getting proper advice as you seek
to navigate between very loud interest groups and also their legal
duties on the other hand as well.
Brandon (27:37)
Well, I'm afraid that's all we have time for today, but
thank you very much, James, for joining us on the podcast
today.
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