Sustainable finance passes through sustainable disclosures.

With its sustainable finance disclosure regulations, the EU is leading the path in policing what can be considered an ESG fund. These rules could become soon the global standard that drive investment into the vast ESG sector. For many ESG funds, last year was stellar in terms of performances. More and more people take into consideration environmental, social and governance issues.

Unprecedented levels of liquidities injected into ESG funds

Investors have placed unprecedented levels of cash into sustainable funds. Asset managers rush to launch new products. Research confirms such investments outperformed rivals. We can consider that ESG is the most important shift in the whole investment industry in a generation. No one could contest that the new “Y” generation also expect greener investments. However, green washing is a real problem. Often companies’ promotion of environmental concerns as an advertising gimmick, no more. Furthermore, I have the impression in general people focus on the “E”, consider that the “S” corresponds to “diversity” and they too frequently forget the “G”. Although governance is important, for example regarding taxes and BEPS rules. Many funds using ESG label are not as sustainable as they appear. Even popular ESG funds invest in carbon emitters, for example. Every fund claims it is some way sustainable, although it may not be. If we do not police and rule ESG as well as fund disclosures, there are risks of this “green” passporting being reduced to a marketing exercise with modest substance. The long-overdue regulation of ESG has eventually allow people to know what their money and investments are used for. With new regulations, EU intends to avoid “greenwashing”. Investment products are now categorized as sustainable and non-sustainable. If you want to market your fund as ESG compliant, you must prepare tougher disclosures. Greenwashing should become more difficult for fund managers. Funds are supposed to demonstrate they are serious about sustainability. But it will also influence the decisions of listed companies which will be under pressure to be concentrate more on sustainable issues or risk losing investor capital. EU aims at re-routing capital to ESG investments.

ESG fund growth

Since last year, we have the feeling that ESG has become a thing. Couple of major fund managers as AMUNDI or BlackRock have, signed a commitment to integrate ESG information into their investment decisions, while the total assets in specialist sustainable investing mutual funds hit a record last year. They agree to adhere to Principles for Responsible Investment. The industry’s interest in ESG has been driven by the combination of factors: rising client demand, including big pension funds, regular savers increasingly demanding sustainable investment options. The Y gen and demographics are moving in favor of this “green” revolution. The expectations of young generations translate into ESG products. In some countries, rules have changed too to push further pension funds to weigh ESG considerations. But it is also a way to differentiate yourselves from competitors at a time when profit margins have come under intense pressure from rise of passive investing. The fact that, according to Morningstar for example, the ESG funds have over-performed equivalent conventional funds over one year, three years and even ten years, helps convincing defenders of ESG that it is THE strategy for the future. I am convinced that last year experience has removed worry that sustainable investing meant giving up returns. The resilience of ESG products is remarkable and raised questions. With ESG becoming the biggest buzzword in investing, even the most cynical fund managers have been jumping on the bandwagon. But if all funds are marketed as “sustainable” these days, how to determine which are the most sustainable ones? Nevertheless, it remains complicate to decipher sustainable products from pseudo-green products. We need policymakers to fix standards and to determine clear regulations to identify and precisely separate the wheat from the chaff. The EU has always been at the forefront of the focus on sustainable finance, preparing series of reforms and classifying system for what counts as green corporate activities. They wanted to set up sustainable finance disclosure regulations.

SFDR

Under the “Sustainable Finance Disclosures Regulations” (i.e., SFDR) all asset managers will have to publish information on their sustainability processes. They will have to classify products into three categories i.e., dark green, light green and non-sustainable depending on their climate and social impact (i.e., colored as for a white products). On top, they will have to report as of 2022 on issues like carbon footprint, investments in companies active in fossil fuel energies and exposure to controversial weapon clusters like bombs, canons, etc…

This regulation is “groundbreaking”. It allows investors to compare between different products how sustainable they are and what sorts of assets the managers integrate into the fund for ensuring “sustainability”. If we may we could compare to this French story of people discovering horsemeat in their Italian lasagna instead of beef. No one would appreciate to be cheated on quality of what he/she buys (or invest to). By changing investment rules, European regulator will change corporate behaviors and force them to become more sustainable to qualify for integrating some funds. To attract more new investors, number of qualified ESG funds is expected to outnumber conventional ones, as asset managers are rushing to make their products “greener”. From being a “plus” it will become a “must” to attract capital. Even if EU is the center of a lot of the regulator sustainability drive, we can expect with the new Biden administration in the US to propel interest in ESG, including rejoining Paris Agreement. ESG will be fully embedded into any investment decision and will be a driver for huge changes in the industry. If you want to remain competitive now, you need to embrace ESG. It will become the main driver for organic growth in asset under management. European regulator has done a lot to remove greenwashing and this type of regulation will have a significant impact on all types of funds in the years to come.

Fran?ois Masquelier - CEO of Simply Treasury