Sustainable finance, ESG, responsible investing… under whichever guise, the topic features prominently on the agenda of any asset manager nowadays. Or so it should, at least.
When the European Commission presented its Action Plan on Sustainable Finance in March 2018, the asset management industry felt that a turning point had been reached: sustainable finance was to become mainstream. Only a year later, this is no longer just a feeling, but closer and closer to everyday reality. The speed of action is indeed unprecedented. A proposal for a regulation on climate transition and Paris-aligned benchmarks, as well as the proposal on sustainability-related disclosures, are on the verge of being formally adopted.
The project to establish a unified EU classification system of sustainable economic activities (“taxonomy proposal”) progresses with vigour. Additional consultation papers, such as on the integration of sustainability risks and factors in MiFID II, promise more concrete action to come. Moreover, demand is growing. Assets under management by European responsible investing funds almost doubled between 2010 and 2016.
The market appears to be driven by increasing client demand, coming from institutional investors, socially conscious millennials and an increasing number of investors – both institutional and retail – ready to contribute to the fight against climate change. Importantly, though, the market benefits also from the growing acknowledgement that a financial return does not necessarily come at the cost of a social or an environmental return.
More and more, an investment is appraised in terms not only of its financial risk and return profile, but also of its social and/or environmental risk and return profile. In fact, even the direct correlation between these various constituents is now widely recognised. In a nutshell: there seems to be a ubiquitous acknowledgment nowadays that there is more to finance than “just finance”. The Association of the Luxembourg Fund Industry, Alfi, has been raising awareness of the opportunities of sustainable finance for asset managers for many years.
The funding needs for sustainable development are huge. In the climate area alone, hundreds of billions are needed annually to reach internationally agreed targets. Funding is needed from a variety of sources – public and private, bilateral and multilateral – and the financing tools to access that funding will reach from donations to investments and loans. In this context, asset managers and investment funds constitute indispensable connecting dots between the numerous sustainability-orientated investors and the various investment opportunities that the development and the climate challenges are presenting.
One of the beauties of sustainable finance is that the ways to go about it are manifold. Asset managers can concentrate on how investments are analysed and selected (e.g. using exclusion policies or screening methods) or on a “target approach” as is the case with thematic investments (e.g. renewable energy).
From an Alfi perspective, the preferential treatment of one strategy over others should be avoided, just like an over-prescriptive approach. Asset managers should have the flexibility to innovate and accommodate investor demand, as well as to proceed at different speeds if necessary. If we can ensure that our focus is on the impact on sustainability issues, then we are on the right track. And we are convinced that, together, we have a lot of positive outcome to look forward to in this context.
By Anouk Agnes, deputy director general of ALFI
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