One element of the Sustainable Finance Initiative of the European Union is the promotion of better disclosure on the integration of ESG factors into investment decisions and advice by financial market participants. To that end, a legislative proposal has been submitted to the European Parliament for an EU regulation on-sustainability-related disclosures in the financial services sector on March 22, 2019. The regulation is expected to enter into force in Q3/Q4 of 2019.
Here are some of the new responsibilities that investors and other financial market participants will face:
Investors will have to publish on their website a policy which describes to what extent and how the organization integrates sustainability risks as well as (potential) negative sustainability impacts into its investment decisions. Where the organization does not integrate/consider sustainability risks and impacts, it has to provide a clear explanation for this. Investors will also have to disclose on their website how their remuneration policies are consistent with their approach towards integrating sustainability risks.
In addition to that, for all financial products with sustainable investment objectives, investors will have to disclose on their website the information that they also communicate in pre-contractual disclosures as well as in periodical reports (see below).
Finally, investors will be required to ensure that the information disclosed on their website is up-to-date. In case of changes made, these will have to be explained clearly on that same website.
For all financial products, investors will have to disclose in pre-contractual information how sustainability risks are integrated into the investment decision making process and how they expect those risks to impact on the return of the product. Again, where the investor does not integrate such risks and/or does not expect an impact on the return of a product, this requires a clear explanation.
For all financial products with sustainable investment objectives, investors will be required to disclose information on the sustainable objectives of a product and how these objectives are attained. Further, organizations will have to inform about the methodologies, indices, and data sources used to assess the impact of a product.
Periodically, investors will have to prepare reports for their financial products with sustainable investment objectives. Here, the investor will need to evaluate (1) to what extent the sustainable investment objectives of the product have been attained, and (2) what the sustainability-related impact of the product is, referring to appropriate sustainability indicators as well as the methodologies, data sources, and indices used.
With regards to their marketing and communications activities, investors will need to ensure that these do not contradict the information disclosed according to the new regulation.
In sum, the regulation will ask investors to enhance transparency regarding their financial products when it comes to sustainability-related information. A systematic and comprehensive approach to ESG management will facilitate the compliance with the new requirements substantially. It is currently foreseen that the regulation will allow for a 15 months implementation period after entry into force.
Let’s face it: Responsible Investment is more relevant than ever. Or is it really? Markets, doing what markets do best, are dynamic and fickle creatures. So sometimes it can be hard to keep up with all that’s going on, especially when it comes to a field as rapidly evolving as responsible investment. To make it just that bit easier for you, the financial consultants at Tauw have summarized 5 current trends in Responsible Investment. Take a look and check whether your knowledge is up to date!
In light of the growing societal awareness around sustainability and climate change, it may not come as a surprise that in recent years, Responsible Investment (RI) is entering, or arguably already has entered, the mainstream. Indeed, since the initiation of the UN’s Sustainable Development Goals (SDGs) and the Paris Agreement in 2015, RI is getting a whole new dynamic. Looking beyond the ever-rising number of UN-PRI signatories, especially in the last 3 years we’ve seen an increasing market development on responsible investment, evident by the huge variety of initiatives, indices & ratings and of course products with a RI connotation that have been introduced. Some are small, some large, some are more asset or region specific, but overall we can clearly see that the market is extremely proactive when it comes to RI. And that’s good news.
At the same time, we realize that the multitude of new initiatives can make it challenging to keep up with this dynamic: there still exists a lot of confusion as to which framework investors should commit to, which product is good or not, and so on and so forth, all the more because there’s always the difficulty of differentiating between the meaningful and the ‘greenwashing’. Which brings us to the next trend.
While we clearly see a wide variety of RI initiatives and strategies taking shape or already in place, there’s always the danger that some of these are more a façade than actually having the goal of investing responsibly. Consequently, regulators, those in the EU in particular, have started to take note and are quick to act.
For instance, we can safely say that the European Green Deal is in fact a strategy to implement the specifics of the Paris Agreement as well as the SDGs. In order to achieve the sustainability goals set out in these agreements, an important investment gap needs to be filled. Precisely to facilitate investments from the private sector and finance the sustainable transition, the EU launched the (Renewed) Sustainable Finance Initiative (SFI), a strategy that is an integral part of the European Green Deal.
To sum things up, the EU has certain expectations for the finance industry when it comes to sustainability and climate change, and a package of new regulations, recommendations and guidelines are currently in the works, most prominently the much anticipated EU Taxonomy. Over the coming years, investors need to be prepared to increase disclosures, be constantly aware of new developments, and most importantly, be on top of them if they do not wish to fall behind.
As we’ve seen, when it comes to RI it’s not about the “why” anymore but about the “how”. And to answer the “how”, we believe that better data will provide key answers in the coming years. This is because, among others, more and better data allow a more effective approach in increasing the sustainable performance of assets.
On the market, asset owners (who are arguably often the first to make a demand in the investment chain) are becoming more critical and more demanding in terms of information that includes qualitative and quantitative data, and are pushing the demands further down the investment chain. This means that in particular asset managers in the alternative investment markets, and consequently their assets, are confronted with increasing reporting and transparency demands, which – to make matters even more complex – often vary in scale and approach.
If your company is publicly listed, you’re also faced with an increased scrutiny by rating agencies. All this means that there is an inherent drive on the markets to provide good and transparent data. Nowadays, technology allows us to aggregate and evaluate big data like never before, but this too comes with a specific set of challenges, that is, if the common ground is not sufficiently defined. However, this is not a straightforward exercise.
Given the variety of initiatives on the market, the variety of activities of assets and asset classes, there is currently no one RI standard which can easily be put into the investment chain. However, certain initiatives in the “initiative jungle” will play a more prominent role than others (foremostly what comes out of the EU’s Sustainable Finance Initiative), and are really helping to provide a good market understanding. We believe that in the future, the EU Taxonomy and Transparency regulation, aligned with key initiatives like the UN-PRI and TCFD, will provide a good tool set towards a best practice management of Environmental Social and Governance aspects. However, we are not there just yet, in particular when it comes to the social and the governance aspects of Responsible Investing.
Why are we such fans of standards, then? At Tauw, we see challenges and misunderstandings between the different actors within the investment chain on a daily basis. That’s why, first and foremost, we believe that standardization would be a great help to create clarity in our common understanding of the topics and issues within RI as well as create a common language in the investment chain. Secondly, standardization would help to align the investment chain in terms of data and the information that is shared, at least in terms of expectations and in terms of what can be produced in a realistic way. Think about the comparability of assets, portfolios and manager performance, and the transparency this would bring. Considering these advantages, we are excited and very interested in the current developments on EU level, because they might just prove to be a game-changer. So keep an eye out (or let us keep one out for you).
While RI is about more than just climate change, after the Paris Agreement in 2015 we’ve seen a renewed focus on the subject, as well as a new dynamic in the markets. Put more boldly, we observe that climate change is the highest priority ESG-issue facing investors at the moment, and the coming years will see it become an even bigger focus.
At Tauw, we strongly believe that in the consideration of climate change, there needs to be a two-way perspective: first of all, you need to ask yourself the question what the impact of your activity on the climate is (the impact view), and secondly, what the climate’s impact on your investments are or will be (the vulnerability view). This two-way perspective includes looking at climate change in a systemic way including physical as well as transitional aspects, or in other words, looking at the broad picture whilst you assess the risks and opportunities that accompany it. Overall, this is not asset specific, as a good climate change risk and opportunity assessment involves a critical look at the supply chain, your own operations and, last but not least, your own products as well.