Insight’s advocacy on systemic and industry issues | Insight Investment

As an asset manager, we believe our primary role with respect to climate change is to understand the financial risks and opportunities created by this unprecedented phenomenon and manage them in the best interests of our clients.

Full details of our efforts are available in our annual Climate Change Report, available here.

Our efforts to advocate on issues related to climate change include the following.

• Committing to the Net Zero Asset Managers Initiative in early 2021. By asset class, Insight’s target includes 100% of UK government bonds, and 75% of corporate bond and equity holdings managed in the UK. Please visit Insight’s net zero pledge page for more details of our initial commitment.
• Participation in industry groups as part of our work managing systemic climate risks, such as the Institutional Investors Group on Climate Change (IIGCC) and Climate Action 100+.
• Support for the Task Force on Climate-Related Financial Disclosures (TCFD), including through our response to the TCFD 2021 consultation on updating its 2017 recommendations. Our Climate Change Report (available here) is aligned to the TCFD recommendations.
• Engagement on green bond issuance. For example, we engaged with the UK DMO on its proposals for green gilt issuance in 2020 and 2021, ahead of its first issuance in September 2021 and second issuance in October 2021. We believe this engagement was constructive and the issuance was ultimately well received, broadly fulfilling our expectations for sustainable issuance and meeting with strong demand in the market.
• Establishing a science-based position on thermal coal investments, which commits to ensuring any holdings related to thermal coal usage will have a clear and actionable plan to exit coal by 2030 for developed market holdings and 2040 for emerging market holdings, while balancing the imperatives of a Just Transition as stated in the Paris Agreement. Insight will look to achieve this, where possible, through effective engagement as we feel this is likely to achieve a better real-world outcome. However, the position developed also has an escalation function which may ultimately lead to divestment if coal exit strategies are not sufficiently aspirational. Insight’s thermal coal position is available here.
• Responding to regulatory and industry consultations on related issues. For example, in the UK, recent proposals to which Insight has responded include climate disclosure proposals for asset owners and asset managers; climate alignment and stewardship proposals for pension schemes; and proposals from the UK Transition Plan Taskforce, which aim to put frameworks and benchmarks in place to help financial institutions and companies in their net zero transition plans. A selection of our responses to consultations are available here.

Bank capital rules can have indirect negative impacts that present risks to our clients and other stakeholders. Issues include leverage ratio rules not recognising high-quality liquid government bonds posted as variation margin for non-cleared OTC derivatives, which strongly incentivises banks to require pension schemes to post variation margin in cash instead of in government bonds; the standardised approach for counterparty credit risk (SA-CCR) results in calculating exposure to OTC derivatives that can be highly punitive for directional portfolios of pension schemes; and new credit valuation adjustment (CVA) and Basel III revision rules do not recognise the high creditworthiness of pension schemes.

We led an initial collaborative engagement with the European Commission on these issues, given how they could each undermine the prudent risk management of pension scheme portfolios or incur disproportionate costs for them.

A selection of our responses to consultations are available here.

New regulations are being proposed encouraging greater transparency on ESG issues, including but not limited to climate change-related factors.

In 2021, we responded to two proposals from the UK Financial Conduct Authority and US Securities and Exchange Commission focusing on different aspects of sustainability and ESG disclosures. We also initiated a collaborative initiative to drive progress on ESG disclosures in secured finance.

A selection of our responses to consultations are available here.

Insight has worked with other market participants to help create a set of best practice principles for dealing in the FX market, known as the FX Global Code. The FX market is global and lacks central regulation. Signatories to this voluntary code agree to adhere to principles of best practice. Insight now trades exclusively with signatories of the code when possible. This initiative has increased market transparency, fairness and robustness. We believe this will ultimately lead to a reduction in systematic risk and better outcomes for all our clients whose portfolios have foreign currency exposure.

A selection of our responses to consultations are available here.

Insight has played a very active role in the interest-rate benchmark reform process, which will have implications for financial markets worldwide as well as for our clients. In July 2017, Andrew Bailey, then Chief Executive of the FCA, made a speech in which he declared that the FCA had persuaded LIBOR panel banks to agree to continue LIBOR submissions until the end of 2021, after which it could not guarantee that the rate would continue to exist. Firms were advised to transition away from the rate.

As noted by the FCA and other authorities, this transition had to be managed very carefully in order to ensure that financial stability risk did not arise because of the widespread use of LIBOR across many instruments in the financial markets, both professional and retail. Furthermore, the nature of the transition could create winners and losers for existing holders of LIBOR-linked instruments.

Our active participation in this debate was to ensure that the buy-side, particularly our clients’ interests were fairly represented at each important stage through the process in order to minimise the chance of winners and losers being produced for not only our clients, but the market overall.

Our activities included participation in the following initiatives:

• UK Sterling Risk-Free Reference Rates (RFR) Working Group
• RFR Tough Legacy Taskforce, which examines regulatory dependencies associated with LIBOR transition.
• RFR Buyside Forum, which was later replaced by the LIBOR transition working group
• Working groups set by the International Swaps and Derivatives Association (ISDA) to focus on LIBOR fallback rates in derivative contracts.
• SONIA Stakeholder Advisory Group hosted by the Bank of England, which supports the Bank’s administration of SONIA by providing advice and technical input to the Bank and the SONIA Oversight Committee.
• Loan Market Association (LMA) and receives regular updates on the dialogue between the LMA and relevant parties. Insight has met with the CEO of the LMA regarding the transition.

In addition, we have participated in various consultations, including the ISDA Benchmark Fallback Consultation, in which we recommended the ‘compounded setting in arrears rate’ for the adjusted risk-free rate and the ‘historical mean/median approach’ for spread adjustment. Both of these choices were chosen by the majority of respondents.

Alongside EMIR (see above), we are engaging on a wide range of industry issues relating to regulation from Europe, each of which could have significant implications for markets and our clients, potentially introducing risks or affecting how investments are managed.

• AIFMD review: In late 2020, the European Commission launched a consultation on the Alternative Investment Fund Managers Directive (AIFMD), which included questions relating to harmonisation of the AIFMD and UCITS (Undertakings for the Collective Investment in Transferable Securities) regimes. We submitted a response in early 2021, and worked closely with trade associations on collective responses.
• Central Securities Depository Regulation (CSDR): We have been working closely with the European Fund and Asset Management Association (EFAMA) to engage on this topic including letters to EU policymakers. We have been working with trade bodies to highlight that mandatory buy-in provision is expected to negatively impact liquidity in the bond markets. We supported the European Fund and Asset Management Association (EFAMA) engagement on this topic including letters to EU policymakers, its response to the ESMA survey and the European Commission consultation. In the UK, the Treasury has announced it will not be adopting these EU rules post-Brexit.
• EU securitisation review: The EU opened a consultation on its securitisation framework in July 2021. Insight submitted a response to this consultation, highlighting similar issues as in the section focusing on the UK securitisation regulation.
• Securities financing transaction regulation (SFTR). The re-use reporting of SFTR rules do not contemplate a client having more than one manager managing assets for underlying bond collateral. Practically, due to difficulties in being able to report accurately, it could lead to asset managers having to stop trading repos in a worst-case scenario. We are working with regulators to try to avoid this scenario. The FCA has acknowledged the issue exists and we continue to work on a solution.
• European Securities and Markets Authority (ESMA) launched a consultation on potential reforms of the EU Money Market Funds Regulation, in light of the “stress experienced by money market funds (MMFs) during the March 2020 crisis.
• MMFs and cleared repo haircut issue: The success of EU-domiciled MMFs depends on the depth and breadth of the funding market to which they have access to. As part of this, many EU MMFs enter into government bond reverse repo transactions, including cleared reverse repo transactions, to earn a return on the cash they have available. This is an important role that EU MMFs provide in their capacity as cash and liquidity providers, particularly in times of stress. However, post Brexit, EU MMFs can no longer enter into cleared gilt reverse repo transactions with UK clearing house LCH Ltd without a haircut being applied – because the EU securitisation regulation requires EU MMFs to apply a haircut to assets received under a cleared reverse repo transaction, unless the central counterparty is ‘authorised’ under EMIR.

A selection of our responses to consultations are available here.

The introduction and implementation of central clearing for derivatives under the European Market Infrastructure Regulation (EMIR) has significant implications, particularly for pension schemes in the UK and Europe.

A significant implication of central clearing would be the need for pension schemes to provide cash to collateralise cleared derivatives. European pension schemes have been granted a temporary exemption from clearing for some years, but regulators and policymakers continue to explore solutions to resolve these issues. Included in this discussion has been the role that repo markets should play, and whether they can always be relied upon in stressed conditions.

We advocated for the original exemption for pension scheme arrangements from clearing, to prevent market dislocations and ensure the needs of pension schemes are met and have continued to participate in the European Commission’s pension fund stakeholder group meeting. Insight proactively highlighted that the EU pension fund exemption must be extended before the exemption expired in June 2021. The European Commission adopted a fast-track approach to ensure this took place.

A selection of our responses to consultations are available here.