Global Sustain Group: ESG Responsible Investments, From Niche to Mainstream?

Recently the ESG / SRI Investments is gaining momentum. The ESG / SRI market, in terms of assets under management, number of ESG relevant funds, number of Asset Owners and Asset Managers that integrate ESG factors into their investment strategies, as well as the number of UN PRI Members, grow at a stable pace the last years. Moreover, the mainstream global and European market leaders of the global investment industry started gradually to commit to ESG products, after having seen the growing market trend in this relative new investment segment.

ESG VS Mainstream Investing. Why to integrate ESG Metrics into the investment strategy and why ESG investment approach could have potentially also a better Return on Investment (ROI)?

ESG Market in terms of assets under management, new funds, new market players, is growing the last years and there is an ongoing positive trend.
ESG funds perform in general well and in some cases outperform in comparison to mainstream funds.

The policy at EU level (Sustainable Finance Legislative Package) but also at national level (Initiatives in France, Netherlands, Luxemburg, Germany etc.) support Sustainable Finance and ESG Investments as a topic encouraging such a way of investing. The national Financial Supervisory Authorities in various EU member states started already survey asking Investors, Insurance Firms, Asset Managers on ESG Investments.

ESG Metrics give the possibility to identify gaps in corporate governance, potential regulatory (also litigation), reputation, environmental, social, operational, market, sectoral and other risks and vulnerabilities in companies, that the financial KPIs do not show.

ESG give you the chance to evaluate and analyze the non-financial KPIs and how sophisticated is the company’s strategy.

ESG is more for mid-term and long-term strategy.

After the positive signal of the Paris Agreement on Climate Change by a vast majority of states and despite the negative signals on topic by the Trump Administration, the policy side especially in EU is willing to support and boost the topic of sustainable finance and responsible investments by proposing also a new regulation. EU can be proud that on that topic is ahead of USA and far ahead of Asia. But how will the new EU Sustainable Finance Initiative and the relevant proposed legislative sustainable finance package proposed by European Commission will impact the investment industry? Is the new proposed EU regulatory framework enough as condition to boost the ESG Investments market or do we need something more than that?

In May 2018, the Commission presented a package of measures as a follow-up to its action plan on financing sustainable growth. The package includes three proposals aimed at:

A unified EU classification system (taxonomy) of ESG relevant Investors, Asset Managers and Funds Establishing a unified EU classification system of sustainable economic activities ‘taxonomy’ setting the basis for the establishment of common standards.
Investors and Asset Managers’ Duties & Disclosures. The proposed Regulation will introduce consistency and clarity on how institutional investors integrate environmental, social and governance (ESG) factors in their risk processes, how their investments relate to ESG factors and targets and explain how they comply with these.
Introducing carbon footprint for Investors and Asset Managers. creating a new category of benchmarks which will help investors compare the carbon footprint of their investments.
Inform and advise better clients (esp. individuals) about ESG factors regarding investment process and decision. The aim is to amend Delegated Acts under the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive.

The European Parliament and Council will review the proposals before the final texts are agreed upon, which is expected in early 2019 and Member States then have two years to implement the proposed legislation.

The Gap in ESG. Exactly because the ESG market is growing and because ESG is not yet regulated and there are no common recognized international standards about which funds and products can be considered as ESG relevant, which Asset Management Firms can be considered as ESG Asset Managers and which persons at the Asset Management Firms can be considered that have the expertise to be called ESG portfolio and fund managers, it is relative easy at the moment to name a fund ESG, therefore, there is at the moment a Gap and a Risk in the ESG industry, that should be mitigated and solved as soon as possible. The membership of an Investor or Asset Manager at the United Nations Principles for Responsible Investment Initiative (UN PRI), is the minimum but cannot be considered anymore as enough condition an Investor or Asset Manager to be called ESG relevant. There is a need for regulation and adoption of common international standardization. The proposed EU legal framework on sustainable finance is contributing in that direction but first it will take time, second it will be valid only in EU and third it does not solve the problem of standardization of the industry, which is necessary. It must be also discussed and clarified which of the existing and applied ESG relevant investment strategies, all of them are some of them (exclusion, inclusion, best in class, norms based screening, ESG Integration, Sustainability Themed Investing, Corporate Engagement/Shareholder Activism, Impact Investing) are accepted and recognized all as equally ESG relevant, since not all are the same complex, not all follow the same ESG criteria and processes and not all lead to same results. For e.g. a fund that integrates only the G (Governance) factor from the ESG metrics in its investment strategy or just excludes (exclusion investment strategy) a few sectors (e.g. defense, gaming industries) from its investment universe in is not in reality at same level ESG with a fund that strictly integrates all 3 ESG factors in its investment strategy and it is fully ESG. Though at the moment both are considered equally ESG funds.

Except the policy initiatives at EU level (recent proposed packaged on sustainable finance) or national level in various EU member states, which support Sustainable Finance and ESG Investments and the good performance of quite a few ESG funds the last years, also the economic changes and trends in the real economy in various sectors lately regarding the three elements of ESG (Environment, Social, Governance) confirm that, there are positive signals also in the real economy and good cases, which could potentially contribute to a swift to a more ESG Investment Philosophy. The transition to the use of more clean energy and less fossil fuels, the gradual growth of sharing mobility and electric mobility (electric cards, electric bikes), the adoption of the concept of smart cities by more and more cities, the digitalization of the state, the cities and the corporate word (E), the shareholders positive activism is adopted more and more and also the gradual understanding by the corporations, investors and banks that a transparent and well – functioning corporate governance scheme is important for the minimization of the risks, the performance and growth (G) and the same is valid for the gender diversity, the company to be a good work place for its employees and all its stakeholders, is considered as part of the society and should think not only of the shareholder value but of the stakeholder value (S) confirm the above.

The ESG Investment market is still a niche with a positive trend to become potentially and gradually a more mainstream segment under the conditions of appropriate regulation and adoption of well – defined common international standards on which funds can be considered as ESG relevant, to avoid the potential risk of a new ESG this time market “bubble”.

Global Sustain Group / Global Sustain GmbH (https://globalsustaingroup.com/) is organising for 3^rd consecutive year in cooperation with Forum for Responsible Investment (FNG – the leading Association for ESG Investments in Germany, Austria, Switzerland & Lichtenstein), Investment Bank Berlin (IBB) and International Bankers Forum (IBF) the 3^rd ESG Responsible Investments, Green Finance & Brands Forum 2018 (http://sustainabilityforum.de/) in Berlin on 26.9.2018 with the motto this year “ESG, from Niche to Mainstream?”.

References:

“ESG, From Niche to Mainstream?”, ESG Market Report & Benchmark Analysis by Global Sustain, 2018.
European Commission, Sustainable Finance Initiative & proposed legislative package, 2018.(https://ec.europa.eu/info/publications/180524-proposal-sustainable-finance_en)-.
Eurosif, European SRI Study, 2016.
Forum for Responsible Investment, Market Report 2017.