On sustainable finance & retail sustainable investing

The text below is an extract of my intervention at the launch event of the 2023 IOSCO World Investor Week (online, 2 October 2023).

On EFAMA’s work on sustainable finance

As an industry, we fully support efforts to address climate change and biodiversity loss, among others.

We commend the European Union for its leadership in that area and actively support it.

We recognize the need to mobilize private capital to finance the green transition.

Hence the need to further develop capital markets in the European Union. We need CMU to finance innovation and spread risks across market participants, and the greening of the European economy will not happen without CMU.

We also need to increase retail participation in capital markets and encourage depositors to turn into investors, especially in view of the increasing retirement savings gap in many of our countries.

We are supportive of providing retail investors easier access to private markets and believe the recent European Long Term Investment Funds (ELTIF) initiative of the EU is a step in the right direction and can play a role in the financing of the transition. ??

We are also active in the field of pensions where we co-launched the European Retirement Week, the third edition of which will take place at the end of November. The ERW provides a platform for a wide range of stakeholders to debate the future of pensions in Europe and to raise citizens’ awareness of the need to save for retirement. EFAMA favors auto-enrolment and sees pension funds as key providers of long-term capital to finance the transition.

We agree that our industry can, and should, help fill the existing financing gap, alongside other stakeholders.

The financial sector has influence and resources that can, and should, be leveraged for the purpose of greening the economy.

This also represents an opportunity for our industry given the increasing interest in, and demand for, ESG investment products and solutions.

Our advocacy efforts are therefore very much focused on ensuring that the regulatory framework being put in place enables us to play that role. We try and inform the debate as much as we can to ensure the legislation delivers on its objectives and to avoid negative unintended consequences.

Over the last few years, we have stressed the importance of some key points, including :

-The need to access reliable, standardized, comparable and high-quality data on investee companies.

We need the data to assess risks, make investment decisions, and hold companies to account. But also to be able to comply with our disclosure obligations and to avoid greenwashing allegations. We welcome the CSRD.

- The need to establish a regulatory framework for ESG rating and ESG data providers, in line with recommendations made by IOSCO.?

-The need to ensure international convergence of sustainability reporting standards. We welcome in that respect the work of the ISSB, and the objective of using their standards as a global baseline. That said, we favor the double materiality reporting approach followed by the EU and support the work of EFRAG, of which we are a member.

-The need to encourage the financing of transitional activities and enabling activities, on top of already green activities.

-The need to ensure that the regulatory framework does not become a tick-the-box exercise as the sustainability journey is not a binary, black-or-white, journey but rather an evolving journey.

On top of our advocacy work, we also provide our members with a platform to discuss implementation and interpretation issues which we may then decide to raise with the relevant public authorities.

Finally, EFAMA is carrying out research in the ESG space, including on sustainable bond funds, on ESG investing in the UCITS market and more recently on ESG ratings.?

On EFAMA’s views on retail sustainable investing

We need to mobilise private capital to finance the green transition. And this includes retail capital.

A problem we face in many European countries is the remaining low level of retail participation in capital markets.

?One of the obstacles to increased retail participation in capital markets is the low level of financial literacy.

There is therefore a need to do more in terms of investor education. This is required to empower investors and enable them to make well-informed choices based on disclosures and financial advice that are well-understood.

At EFAMA, we strongly believe in investor education, alongside an appropriate investor protection framework.

This is the reason why EFAMA is a long-time supporter of the World Investor Week.

The retail investment world can be very complex for the layperson. And the whole sustainability and ESG debate adds a level of complexity to it. Hence the a need to double our efforts to increase financial literacy and fill this knowledge gap. ??

That said, while investor education is important, we cannot expect retail investors to become financial experts.? It is therefore very important to ensure that high-quality advice is available and affordable.

This issue of availability, affordability, and quality of advice is currently hotly debated in the European Union following the recent publication by the European Commission of a Retail Investment Strategy, the aim of which is to increase retail participation and provide investors with even better outcomes.

The quality of advice also depends on the financial and sustainability literacy of the financial advisers, something the European Commission has rightly stressed.

On EFAMA’s views on challenges and opportunities in the retail sustainable finance space

Interest in, and demand for, sustainable finance products are increasing as ESG challenges keep increasing. So, there is an opportunity to develop investment products that meet this demand and help address some of those ESG issues.

?While sustainable investing represents an opportunity, it also comes with its own challenges.

The low level of sustainability literacy is one, as indicated earlier.

The complexity of some of the disclosures is another one. Some of those disclosures are really difficult to make sense of for the average investor.

Another challenge is the confusion about what sustainable finance can and cannot do. There is a risk of mismatch between what the retail investor expects from its sustainable investment and what the investment product actually delivers.

To avoid this risk of mismatch and potential greenwashing allegations, there is a need to better explain the various investment strategies available (best in class, exclusion, thematic, engagement, impact investing, etc.) and the kind of impact it has.

In particular, I think our industry should do a better job at explaining the value of engagement with investee companies, which I believe is still poorly understood and under-appreciated. This is a pity as it constitutes a key aspect of the work of asset managers who are more and more holding investee companies to account, especially on ESG metrics and their net-zero transition plans. This is also due to the increasing transition risks some companies are facing.

?Under the current system in the European Union, financial advisers are mandated to elicit the ESG preferences of the retail investor by way of standard questions. The focus is very much on WHAT the investor wants.

?I would argue that the focus should first be on the WHY, i.e. the motives for making ESG investments in the first place.

?This is important to be able to recommend products that meet investors’ expectations and avoid this expectation mismatch I was referring to earlier.

?What is it that motivates you to invest sustainably? Is it a question of values? The quest for a direct impact? A question of risk and return?

?Knowing whether and WHY the investor wants to invest sustainably and then WHAT his or her ESG preferences are, will help recommend investment products that match investors’ expectations.

More work should also be done around the notion of impact as there is still some confusion regarding the difference between for example investor impact and company impact.

EFAMA will be publishing a brochure on sustainable investing that aims to clarify some of those concepts and help investors increase their sustainable investing literacy.

By way of conclusion, we welcome the consultation recently launched by the European Commission on the Sustainable Finance Disclosure Regulation and see it as an opportunity to think about some of those issues in a more holistic and strategic way and with the benefit of hindsight, for example when it comes to disclosures and the type of investment strategies.

On some key recommendations

To retail investors, I recommend:

-to learn about the main sustainable investing strategies, making use of the many good educational resources that are available online, including EFAMA’s upcoming sustainable investing brochure; and

-to question the motives of their willingness to invest sustainably.

?To financial advisers, I recommend asking their clients whether and WHY they have an interest in sustainable financial products before asking them WHAT their ESG preferences are.

To asset managers, I recommend better communicating on the value and impact of their engagement with investee companies and more broadly on their ESG activities, including research activities

And to policy-makers, I would reiterate the strong support of the European investment management industry for a regulatory framework that is consistent and clear, and that enables our industry to play its part in addressing some of the most pressing issues affecting society.

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