The meed for legislation and taxonomy

Green investment is revolutionising the fund industry. Clients are demanding good quality, effective products and regulators are working hard to build trustworthy ESG standards, as the risk from accusations of greenwashing is real. Two panels at the ALFI Rentrée addressed these challenges directly.

“In thirty years in the asset management industry I have never seen a trend unfold as quickly as the move to impact investing,” said James Broderick, of the Impact Investing Institute. “If you follow the flows of capital you can see that sustainability is a business challenge for all asset managers, regardless of their personal opinions on the subject,” he added. The on-going climate crisis will sustain this trend, he believes.

Regulation: a powerful tool

“Investors are looking for authentic sustainable investing,” commented Tobias Huzarski, Head of Impact Investment, Commerz Real AG. Yet a central challenge is that each individual has their own perspective of ESG investment. Some simply want to reduce the negative effects their investments might cause, while others expect their money to contribute to making a positive impact.

“Regulation is a powerful tool to shape green investing,” commented Philipp Mueller of BlueOrchard Finance, an impact investment manager. “People want to put purpose behind the capital they invest, and we need credibility with measurable impact and an avoidance of greenwashing.” Hence why the industry is so hopeful, even expectant, that the classification (taxonomy) and reporting rules in the EU Action Plan on Financing Sustainable Growth will provide greater clarity for asset managers and clients.

Green taxonomy: a start

“The green taxonomy is a good start, and it could evolve in the future into a different range of labels, much like the energy efficiency rankings attributed to household goods,” remarked Pedro Fernandez Diaz, of responsibility Investments, an asset manager. That said, there are concerns in the industry that the timetable is too tight, and the drafters of the new rules are listening. “The Commission is considering a delay in the SFDR's [Sustainable Finance Disclosure Regulation] regulatory technical standards, which would take effect 2022,” noted Martin Mager of the law firm Linklaters. “Nevertheless firms would still have to comply with the level one requirements from next March using their own interpretations,” he added. 

“Reliable, transparent, and meaningful data for sustainable finance is the way to create trust and confidence among investors,” said Julie Becker of the Luxembourg Stock Exchange. She said this in the context of the LuxSE’s on-going work to create a data hub for green and other sustainable bonds. “It will convert unstructured information into structured data, offering 150 data points on 750 instruments by the end of the year,” she noted.

Sustainable by default

“Finance should be sustainable by default, which means transparency,” she said. Mr Broderick agrees: “it's better to think of all investment being on an impact spectrum, with greater or lesser environmental and social benefits as well as financial returns.” Indeed the change to Mifid II rules requiring that clients be asked about their desired exposure to ESG criteria is a further incentive in this direction. 

Ms Becker would like to see more, saying “the EU's taxonomy doesn't go far enough, being limited to climate change,” with social and governance questions needing to be addressed. This might be on its way from the bottom up, Mr Broderick argued: “the climate crisis has been a catalyst for creating a link between problems and investment decisions. But the pandemic has shifted the focus to a broader range of environmental and social issues”. However, Mr Mager pointed out that these criteria are particularly difficult to measure. 

The panel agreed that asset managers and distributors have a major challenge regarding investor education around these products and concepts. However, this complex task can be facilitated given the nature of investor engagement. “The question is ‘how long asset managers can afford to be non-compliant”, commented Mr Fernandez Diaz, with the investors and lenders of the future demanding commitment to sustainability.