September 17, 2018

Monday Morning Memo: A comment on the sustainable finance initiative of the European Commission

by Detlef Glow.

One of the largest hindrances for the distribution of sustainable investments (SRI/ESG) is the fact that fund promoters do not use a common taxonomy to describe their investment approaches. This different wording confuses investors and holds them back from investing, since it isn’t clear to them which approach would best suit their needs. With its sustainable finance initiative the European Commission (EC) is seeking to build a framework that fosters a more sustainable investment environment.

From my point of view such a taxonomy and the resulting unified classification system are needed to accelerate the integration of nonfinancial criteria into the mainstream investment process as well as to drive the future growth of specialized sustainable investment funds. Therefore, I agree with the position paper of the German fund and asset management association BVI on this topic. I also agree with the view that a holistic approach would be key to the success of this initiative. Environmental considerations should only be a starting point for the proposals.

In addition I agree with the BVI that the upcoming regulation needs to be holistic, i.e., it needs to cover all asset classes, investment strategies, and vehicles in order to enable investors to make informed investment decisions about ESG risks. This means the disclosures need to be as simple as possible but at the same time detailed enough for investors to determine the ESG risks within a given investment vehicle. In addition, the EC must avoid double disclosures that may come from the requirements of another regulation, such as the regulation on disclosure relating to sustainable investments and sustainability risks, which may not harmonize with the taxonomy.

All in all, it can be concluded that the upcoming regulation by the European Commission can have very positive effects on the investment decisions made by investors about the ESG impacts of their investments. It also has the potential to foster the integration of nonfinancial (ESG) criteria into investment products, which will be the key driver for sustainable investments to become mainstream, i.e., to reach retail investors. That this assumption is correct can be seen in the activities of large asset management companies such as BlackRock, DWS, and UBS, who have already started to integrate nonfinancial data into their conventional mainstream products.

 

The views expressed are the views of the author, not necessarily those of Lipper.

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