Analysis: What would “Brexit” mean for ESG in the European Union?

UK leaving EU would be “profoundly destructive” for asset management

UK Prime Minister David Cameron set the clock ticking on a referendum on the country’s continued membership of the European Union over the weekend.

The issue has split the ruling Conservative Party and high profile figures such as Boris Johnson, the popular London Mayor, and various ministers will campaign for “Brexit”.

Putting aside the wisdom of generating this level of uncertainty when the global geo-political and macro-economic situation is so unstable, simply put, a weakened European Union prompted by a UK withdrawal could ultimately lead to a weakened European governance regime.

But amid all the rhetoric, there has been remarkably little analysis about the impact on the asset management industry and by extension, the environmental, social and governance (ESG) sector. It goes without saying that markets don’t like uncertainty.

The UK is a leader in many respects, at the forefront of corporate governance over the decades and the first to develop a stewardship code. More recently it has introduced the world’s first regulations around modern slavery. To take this input out of the European equation would be a blow.

How about the impact of the UK’s exit on the European funds regime? How will this impact UK-based asset managers running funds under UCITS? Nobody really knows, except that it would be extremely negative.

The Investment Association, which represents the UK fund sector, told RI Brexit would be “profoundly destructive” for the export of asset management services and products, as well as potentially having consequences in other areas, such as access to market infrastructure.

“Leaving in such circumstances, coupled with the likely loss of influence over the rules with which we would have to show equivalence to continue to operate within the EU, would not be a desirable outcome for our sector,” the body said.

The IA – whose members represent a staggering 37% of the EU’s managed assets – says the single market, fund passporting rights, the UCITS regime and a “relatively harmonised single rulebook” have all brought significant benefits to the UK’s asset management industry.

What about the pension fund directive, Institutions for Occupational Retirement Provision (IORP). The revision to this directive recently got the nod through the European Parliament’s Economic and Monetary AffairsCommittee – with strong ESG elements including thanks partly to UK MEPs such as Anneliese Dodds. A powerful voice on CSR has been heard from the UK’s Richard Howitt over the years.

Then there’s the European Commission’s whole long-term financing plans and the Capital Markets Union project. A weakened EU will leave all this totally up in the air.

As for insurance, industry group the Association of British Insurers (ABI) claims UK insurers “sell £21bn more in insurance & long-term savings products to the rest of the EU than they sell to us”.

The Pension and Lifetime Savings Association (PLSA), the former National Association of Pension Funds, will debate Brexit at its annual investment conference next month – reflecting its importance to the institutional asset management industry.

Star fund manager Neil Woodford’s firm last week released a report it had commissioned from economic research consultancy, Capital Economics. It found exports of financial services to the EU, which amounted to £19.4bn in 2013, would be halved with the loss of passporting rights to c£10bn.

But this surely underplays the huge net benefits that the UK, and London in particular, has gained from the single market.

Intriguingly, one of the UK ministers behind the “out” campaign is Theresa Villiers. In a former guise, she was an MEP who shepherded the Investment Services Directive (now known as MiFID) through the Parliamentary process.

What gets lost in the debate is the extent of UK influence at Brussels, certainly in the finance realm. Take, for example, Jonathan Hill, who holds the key post of European Commissioner for Financial Stability, Financial Services and Capital Markets Union.

It’s his task to implement the Capital Markets Union project, widely seen as a sop to the UK financial sector with its focus on securitization. If the UK exits the EU, what happens to that? Even were Brexit to occur, it’s likely that English would remain an official EU language.

Writing before the weekend, Magdalena Andersson, Sweden’s Minister for Finance wrote: “The EU is a better union with the UK as a member.” It’s surely incumbent on the institutional investment sector – and its ESG component – to make its voice heard as loudly as possible before it sleepwalks over a precipice.