Responsible investment: pragmatic persistence | Insight Investment

Good morning everyone. What I am going to talk about a little bit in my section today, is the responsible investment landscape as we see it today and then some of the interesting areas really that we are working on and will be working on in the coming years. You won't be surprised, given everything that you've heard today, that a lot of what I'm going be talking about starts with what's going on in the White House. If I think back to the start of 2025 I think my overriding feeling would've been representative of a lot of people in the responsible investment community, which would've been, basically a feeling of trepidation about what was to come in 2025. we were already in a period where there was a rising level of scepticism, I think around responsible investment, and the importance of ESG and sustainability factors in as drivers of investment performance for the best part of the last five years. As you can see here, flagship sustainable equity products like clean energy, trackers had dramatically underperformed, wider equity markets.

And we had started to see people take a step back from these allocations and generally a questioning of whether things had gone too far in the SG space enter Donald Trump, to the White House with a promise to continue to dismantle any and all ESG architecture.

And famously, as we put here to, drill, baby drill and you can see, why the ingredients were there as I've termed it up here for the potential for it really to be a sort of anus herbalist for the responsible investment industry. yeah, the reality as is so often the case was more nuanced than that. certainly there were some extraordinary challenges and I've highlighted these on the left hand side here. there were really aggressive moves against shareholder rights, in the us specifically at the SEC, which led to, a a lot fewer ESG related shareholder proposals.

So these were down 22% year on year according to Morningstar. you also had key pillar activities like renewable energy that came under pressure due to due to the approach that was taken in the us.

So this had major, if you think of something like offshore wind, this had major impacts for key market participants, like ted which lost a third of its equity value over the year and saw bond downgrades and spread widening. You saw generally, within the industry and more broadly, a scaling back, of net zero movements. Probably the best example of this was the effectively the implosion of, the net zero Banking Alliance which doesn't really exist in any meaningful way anymore. you saw continued outflows from US equity sustainable funds.

So bark these estimates, 63 billion of redemptions from US funds, and 61 billion of redemptions from global e equity sustainable funds, contrasting this with 32 billion of inflows that you actually saw into ESG bond funds.

So that's an interesting dynamic to be aware of. and then you have seen a row back on on the regulatory side obviously there has been a big focus in the US around this including things like SEC disclosure rules which basically mean that companies don't have to disclose as much around their climate risks and opportunities, as was proposed previously.

But even in Europe, you've seen some regulatory roll back with things like the EU omnibus legislation coming into effect, which is designed to improve the competitiveness of European companies.

So there were a lot of challenges during the course of the year, but actually back to the point that that Adrian was making, we also saw investors really looking through some of the noise and that really starts with the asset owner community.

So in terms of, in terms of what we've seen and and, you know, there's evidence from company from companies like FTSE Russell that have surveyed this. There hasn't been a big change in terms of how asset owners are thinking about their sustainability requirements. and indeed, actually the surveys that we've seen show that there is actually an increase in the use of ESG and sustainability factors in mandates with investors citing climate concerns primarily but also motivations by fiduciary duty. in terms of when we are talking to companies sustainability, initiatives are still happening. They're just not front and center, you know they're not out there in the press to the same extent. and that came clear through the engagement activity that we did in 2025. In the next slide, I'll point to something really interesting dynamic that has been happening in the equity space in terms of demonstrating the flow of capital into transition related energy transition related, companies.

And then I guess the final point is that, you know, yes there has been a regulatory road back but is some of that sensible had it gone potentially too far in Europe? And, you know, is the, is this just a sort of sensible pruning of, what needed of the rules that were out there? so where we've landed and where we think responsible investment will end up in in 2026 and beyond is that you do have a more pragmatic version of what was there before. It's more accountable but it doesn't mean it's not happening. and I'll give you some examples, of how that happens for us going forwards. so what I wanted to show here was just, again if you take a step back to the start of 2025 how would you have expected certain asset types to perform? So obviously this is the performance of the s and p index, pretty strong performance up 16% last year. Going back to the sort of drill, baby drill comments you might have expected decent performance from global Energy Index but actually, you know, there was it was pretty flat basically year on year specifically you might have expected very strong performance in the us energy sector that was actually marginally down. Whereas when you compare that to the Clean Energy Index over the course of the year you can see a huge level of outperformance.

And again, this comes back to this theme of investors looking through thinking longer term about the trends that that are happening and basically a belief that clean energy is gonna be very important in delivering ai.

And you, I mean, you saw that yesterday with some of Elon Musk's comments in the Tesla results as well on the importance of solar in particular for being able to deliver ai.

So you have had this inflection point that has that has happened that maybe provides some support to investors thinking on a more thematic angle. so what are we what are we spending our time on at Insight? we are focusing on financially material sustainable, sorry, financially material sustainability risks in the world as we find it today, not as we wish it to be. Now, it might sound like I'm sort of cribbing that of Mark Carney's speech last week but I can assure you I actually wrote these slides before he did that speech, so I think we have to investigate a leak of quite how he got hold of them. but what this, what this means for us for example, is accepting that climate change is happening today and thinking more about the financial ramifications of physical risks.

So what you can see on this slide is we we have had a process for analyzing physical risks tooling available to us for a few years now.

But what we are looking at in more depth now is thinking a about this on a cross asset class basis and also thinking of the different types of physical risks and whether some of them are more material on the shorter term basis.

So acute physical risks like wildfires and the impacts that they might have on different asset types versus thinking about more chronic physical risks that may occur over the long term but maybe won't have the same sort of financial ramifications.

So some of the questions that we are looking at looking at answering are certain physical risks more likely to impair value than others over the timeframe of a specific investment? Which asset types are most likely to be impacted? So are there certain asset types that have very heavy geographical concentration like municipal bonds, for example or certain a BS securities? and do we need to start considering regional risk premier? So one thing that we did last year was we we developed a physical climate risk for sovereign bonds and that has highlighted potentially certain regional areas that are obviously much more exposed than others, and how do we factor that into our investment process? So that's one thing that we're one thing that we're looking at. another is we're we are also thinking about financially material sustainability issues that are emerging. and obviously ai we've spoken a little bit about it today. AI is one of those areas. and what are the ESG implications of around an AI build out? so last year we started this process by looking at the e implications, which Shahir has touched on in terms of data centers in particular and how they, how they can operate in areas of water scarcity, what that competition looks like.

And we looked at this, for both private and public, issuance across the corporate bond and a BS transactions this year. we're now turning our attention to how ai rollout is governed and the control structures in place around it.

So I'm sure everyone in this room is very aware that everybody's getting very excited about the upside from AI trades but we also think that there is potentially significant credit risk that will come from ineffective AI rollout.

And on this slide you can see some of the potential financial con consequences of not doing AI properly.

So we'll be looking at what's a best practice, strategy and controls framework looks like for ai and the structures that companies have in place to mitigate some of the risks set out on this slide. another area of focus for us has been on broadening our stewardship activity to cover at a more macro level.

So moving beyond just looking at company level stewardship to think about how we can be better stewards at a systems level. this will be very familiar to a lot, a lot of you guys in this room, but we did quite a lot of thinking about this and what our role should be. as it's important to recognize that we in and of ourselves don't have the mandate to try to set policy. however, as investors, we do have a unique insight into how capital flows and what investors need to see from an investment decision making position.

So in 2025, we set we set out our thoughts on this in a, policy advocacy document, and these are some of the areas that we have been pursuing in that regard.

So firstly, we've been pushing the government to have a more standardized set of disclosures around their guilt emissions. we held a round table with a number of clients on this year. It, we heard loud and clear that they wanted more standardization there and that's something that we have been pursuing with the government. Secondly, we've been working as part of industry groups to help convey the investor perspective on how, NDCs and transition plannings will be integrated into investment decisions both in the UK and in Australia as part of a PRI initiative there. thirdly we've been inputting into the UK government led discussions on how you go about mobilizing transition finance.

And finally, we continue to play a prominent role in the green bond market in terms of helping develop, best practice and working with, standard setters on things like how do you assign the correct carbon footprint to a a green bond to make sure that it is representative of what that instrument is actually funding.

So lots of areas that we're working on effectively that go beyond just talking to individual companies to thinking how do we act as stewards of the system in in which we operate. and then I guess the final, point that I wanted to make was coming back to the comment that I made around asset owners, staying the course. whilst you have seen those outflows in sustainable equity markets, what we've seen, at Insight is that we haven't really seen any sort of let up, in terms of clients requesting tailored fixed income solutions that deliver for their stakeholders on both the sustainability side and on the financial return side.

So what I've pulled together on this slide is just a subset of, some of the mandates that we've onboarded, we won and onboarded this year. and you can see, sort of going across different strategies and across different geographies. firstly, I guess there's three there's three points to make on this slide. The first one is that, is that range, you know, of of solutions that people are looking at. It's very clear that climate is primary in people's minds. but there are also, there are also clients that are looking to achieve structural impact as well through their mandates.

And that's what we've seen., that's what we've seen across our platform. The second point is that it this isn't concentrated in a single geography.

So you, on this slide, you can see that there is a focus in Europe undoubtedly but we've seen global interest in this. We've seen clients in Australia that have asked for carbon related, restrictions in their portfolio. We've got actually clients in the US who are targeting things called implied temperature rise metrics.

So this is very much, a global thing but obviously with its epicenter in Europe. and thirdly, I guess the point on the bottom right that we're trying to make is that the ESG capability that we have has grown into really a structural part of our business.

So the what you can see on the bottom right hand corner is obviously there are clients that have a baseline level of exclusions or specific exclusions but there's a pretty material proportion of our business now, which looks to go beyond exclusions and build in their own specific sustainability targets into their mandates.

And that represents now, you know, best part of a quarter of our total credit, a will have some of these binding, constraints in them.

So really, I guess the takeaway that I wanted, everybody to have from this is that whilst the world is changing and there is a high level of volatility responsible investment is still important. It's still happening. It may not be quite as visible it may not be printed everywhere as it was a few years ago but it's definitely important for delivering client outcomes.