ESG – Third party information

Despite efforts to define and clarify what ‘ESG funds’ are, the term’s ambiguity persists, leading to confusion and debate over the term, according to a recent report. The paper, How to Build a Better ESG Classification System, examines a selection of existing regulator and industry ESG fund classification frameworks in the US, the European Union and the UK, finding a lack of focus on observable features, imprecise definitions or an incomplete logical structure for assigning funds to mutually exclusive groups.

Last month, the European Securities and Markets Authority (ESMA) published its opinion on the EU Sustainable Finance Framework (the “Framework”) which builds upon the recent ESMA Progress Report on Greenwashing and the Joint ESA Opinion on the review of SFDR (the “SFDR Opinion”) (see our Insight here). The opinion covers the long-term vision of the securities markets regulator, outlining their view of the Framework and setting out policy recommendations to improve and develop the Framework.

The UK General Election resulted in a change of government in the UK. This has meant that the usual summer slowdown has been replaced with a flurry of activity as new ministers pick up portfolios and start to turn manifesto into reality. In Europe, work continues apace with an uptick in ESMA and regulator supervisory activity and guidance.

Over the last few years, the consideration of Environmental, Social, and Governance factors have grown in importance when it comes to investment decisions, with ESG ratings serving as a critical benchmark for investors seeking sustainable and ethically sound investment opportunities. However, the reliability of these ratings has come under scrutiny due to concerns around the accuracy of data used, and challenges in comparing ESG indexes compiled by different agencies. The absence of standardised reporting requirements and independent verification processes increases the financial risk for investors who make decisions based on such ratings.

ESG hasn’t been yielding the desired financial performance of late, and the absolute necessity of achieving carbon neutrality by 2050 does not diminish investors’ demand for a return on capital. Constrained by their fiduciary responsibility to their clients, investors are abandoning the preservation of the biosphere and biodiversity in favour of the search for yield. Meanwhile, some of the world’s largest asset managers have scaled back their ESG ambitions. BlackRock, JP Morgan AM, Pimco and State Street Global Advisors left the Climate Action investor coalition in February 2024. This seemingly backward step for the sustainable investing community is also evidenced in the changes to proxy voting policies: BlackRock, State Street and Vanguard have significantly reduced their support for shareholder proposals on environmental and social issues.

Europe has its climate-related disclosures standards coming in 2025 in the form of the Corporate Sustainability Reporting Directive, while the European Sustainability Reporting Standards, focused on Scope 3 emissions, is going live in 2024 reports. Meanwhile, across the pond, the US has opted for a “watered down” reporting framework, which could be rolled back further depending on the outcome of the presidential election. This article explores why there is a need for a more balanced approach from the two regions, and how this will impact the green bond market.

On 27th May 2024, ESMA published its final report on the 2023 Common Supervisory Action and Mystery Shopping Exercise. Together with National Competent Authorities (Regulators), it investigated the compliance of investment firms with MiFID II disclosure requirements as applicable to marketing communications, including a review of specific examples of such marketing communications. The report shows the findings of this exercise and sets out the authorities’ next steps as well as areas for improvement more generally.

With today’s strong returns across asset classes, institutional investors have no excuse not to explore meaningful sustainable investing deals, it was argued at a recent Conference in the Middle East. Five years ago, when the conversation about green bonds first started, investors were worried that they had to sacrifice returns. But, after 2022, interest rates have risen considerably. Almost all the fixed-income assets offer a much higher return than in 2021 … So what are you waiting for?

Asset managers and consultants are closely watching how the U.S. presidential election could impact renewable energy investing. Those with a focus on the sector are trying to discern whether politics around, and specific economic incentives borne out of, the Inflation Reduction Act and its myriad tax credits for clean energy will change after the November election.

This report how looks at how the world could start to see emissions fall in 2024, exploring the momentum in each of China, the US, India and the EU that could make that prospect a reality. In doing so, the report outlines how the race towards solar, wind, electric vehicles and many other net zero technologies is hotting up, driving seismic changes in the global economy.

This article takes stock of what global policymakers developed in 2023 to deliver on their net-zero commitments and other sustainability-related goals and in response to the spike in investor demand. More importantly, we seek to provide some guidance on what we believe is in store for an equally crucial 2024.

United States: New Hampshire state legislators are seeking to expand their attack on ESG investing with two new proposals, including a bill that would make it a felony to “knowingly” invest state or taxpayer funds using ESG criteria that violates what legislators define as fiduciary duty.

The global green bond market has taken off in the last year and the asset class is now an established part of the fixed income universe. They provide a unique opportunity as they enable direct impact via a simple premise.

The energy-themed day at COP28 saw a fresh wave of fossil fuel commitments from countries, as well as a new initiative aimed at tackling emissions from cooling appliances. As COP28 negotiators wrangled over numerous contentious aspects of the latest draft texts – including the high-profile fight over proposals for a global fossil fuel phase out – there were signs of steady progress elsewhere at the Summit as a number of governments made new commitments to accelerate the transition away from coal, oil, and gas.

EFAMA (European Fund and Management Association) remains very active in encouraging authorities to raise financial literacy levels in the general population, as well as through industry professionals, through widespread and improved financial and investor education initiatives. This brochure forms its contribution to IOSCO’s World Investor Week, of which it is a long-time supporter.

A recent survey found that 85% of investors think ESG leads to “better returns, resilient portfolios and enhanced fundamental analysis.” Among executives surveyed, 84% said ESG helps them “shape a more robust corporate strategy.”

The appetite to invest along ESG lines has grown hugely over the past five years, but there are four major challenges to this approach that are growing rather than becoming more manageable. That’s according to Morningstar’s second annual Voice of the Asset Owner survey, which revealed two out of three asset owners (67%) believe ESG has become more material to investment policy in the past five years.

The European Commission is consulting on how the Sustainable Finance Disclosures Regulation (SFDR) is implemented and whether to build out Articles 8 and 9 into fund labels or create new, investment strategy-based labels.

This looks at how assessing ESG risk can inform sustainable investment strategies. As more investors seek to make more sustainability conscious investment decisions, this guide aims to provide an overview of one of the most common sustainable investing approaches: limiting ESG risk.

This guide specifically focuses on ESG reporting and what has driven its demand. It also looks at how firms and advisers can advance their reporting capabilities and empower investor decisions with ESG data and solutions.

The majority of global investment funds are not aligned with the goals of the Paris Agreement, with only 1.5% aligning with a 1.5C scenario, while none are aligned when considering scope 3 emissions, according to recent research.

ESMA’s primary objective is to promote harmonised and coordinated action by national competent authorities (NCAs) concerning the inclusion of sustainability-related disclosures in prospectuses under the current legislative framework. It recognises the evolving landscape of sustainability disclosures and aims to bridge the gap between the present disclosure requirements and the anticipated future requirements, such as the regulation on European green bonds.

Green and other ESG-related bonds crossed a $4 trillion threshold in the first half of 2023, despite a sharp drop in ones from the United States.

On July 31, 2023, the European Commission adopted the first set of ESRS (European Sustainability Reporting Standards). These will soon become law and will apply directly in all 27 EU member states. Companies will need to report in compliance with these new ESRS as early as the 2024 reporting period.

Baillie Gifford has responded to accusations made by climate activist Greta Thunberg, who pulled out of the Edinburgh International Book Festival on Friday after she claimed the Scottish asset manager’s sponsorship amounted to ‘greenwashing’.

There were £304m in outflows in May, the worst month on record and only the second month in five years where the sector experienced outflows. In the face of increasing volatility and rising interest rates, flows into different sectors shifted rapidly throughout May, according to a monthly Fund Flow index.

A ShareAction report has exposed the failure of leading asset managers to address biodiversity loss and climate change. The research vetted the world’s 77 largest asset managers and found a lack of ambition towards key issues like net zero and deforestation.

This guide explores what firms and advisors should know about ESG reporting specifically, and looks at how they can advance their reporting capabilities and empower investor decisions with ESG data and solutions.

This update seeks to outline significant sustainable finance and ESG developments in policy, regulation, legislation and the industry. Items are presented in reverse chronological order (UK, Europe ex UK, North America, APAC and MENA and Market Intelligence).

Institutional investors committed to ESG principles admit they were slow to take the anti-ESG movement seriously. Now, as more than a dozen states consider legislation to prohibit public pension funds or other public funds from investing with money managers considering ESG factors, and a handful of states have already enacted some limits, asset owners and managers are fighting back.

Flows into sustainable funds reflect growing investor interest. According to asset flows data, despite inflationary pressures, rising interest rates, concerns of a global recession, and the war in Ukraine, the global universe of sustainable funds still attracted $22.5 billion of net new money in the third quarter of 2022. While this represents a significant decrease from the $142 billion high at the end of 2021, sustainable funds continue to prevail in this period of uncertainty compared to the broader market which has seen outflows of $198 billion in third-quarter 2022 alone.

Level 2 of the Sustainable Finance Disclosure Regulation (SFDR) came into effect on 1st January, further tightening the regulations around funds classified as Article 8 or 9. The closing months of 2022 saw funds worth tens of billions downgraded from Article 9 to 8 ahead of the introduction of the tighter transparency requirements.

ESG principles drive impact investing and are essential to building sustainable, inclusive businesses of the future. However, creating positive, meaningful impact necessitates that the authentic intention espoused by impact investing rests at the heart of the value system of a business. Real impact is only possible when impact investing is a raison d’etre of the business.

A new report says that European investors have begun removing their money from ESG funds in 2022 as AUM across the whole fund industry has declined from €15.3trn to €13trn over the first nine months of the year.

Investors’ enthusiasm about ESG issues remains strong, with nearly half willing to stick with that commitment even if the financial returns are lower, according to a Deutsche Bank Private Bank CIO survey. The findings come in a torrid year for ESG investments, which have been left behind as growth stocks slumped and commodity prices soared.

Nearly 20% of Article 9 sustainable funds are breaching ‘do no harm’ standards, according to new research. This means they have more than 10% of their investments in companies that have violations of the UN Global Compact principles or the OECD Guidelines for multinational enterprises.

We all know the global economy is going to have to wean itself off carbon over the coming years. Investment managers need to think about how to reflect that in portfolios – the task is to understand how important carbon is to the businesses you are investing in. If you have two businesses doing the same thing and one is using more carbon to produce the same amount of revenue as the other, consensus is growing that it makes sense financially to invest in the one with lower carbon intensity, as it is better prepared for what lies ahead.

Switzerland issued its first green government bond recently. The move could be a key point for corporate green bonds there too – when the Swiss capital market sees that the government is issuing Swiss federal government bonds with a green framework, this will be a strong positive signal and a significant driver for future green issuances.

This provides an overview of the latest developments in the area of financial sustainability regulation, in particular the European Commission’s final Regulatory Technical Standards under the Sustainable Finance Disclosure Regulation and the European Securities and Markets Authority’s implementation timeline and its strategic priorities for the next five years.

ESG may have had a tough few months in the face of geopolitical and macroeconomic headwinds, although the topic remains very much at the forefront of investors’ minds and it has proved far more resilient as an asset class than it might initially have been expected to.

More than one in four ESG funds marketed under the European Union’s deepest green label are at risk of being stripped of their designation. 663 funds set a minimum level of 0% investment in sustainable investments, and another 780 have a minimum of between 0.1% and 85% in sustainable investments.

The regulator’s own climate report offers plenty of lessons for firms who want to address climate change. This paper focuses on the regulator’s own activities, but as the FCA is dividing the work required into four categories (governance, strategy, risk management, and metrics and targets) these four layers could also be used to ensure that an IFA firm’s sustainable investment strategy is robust and resilient.

From 2^nd August 2022, the amended MiFID II requires financial advisors to consider clients’ sustainability preferences when conducting suitability assessments. Patchy data and a lack of direct comparability between products mean that financial advisers will struggle to fulfil their new obligations.

The EU’s Joint Research Centre gathered university academics and policymakers to explore the latest revelations of academic research on green or sustainable finance. The fact that the gathering occurred during a heatwave only accentuated the urgency of the debate.

Advisers should brace for changes in the way they operate, advise and recommend funds as the industry moves towards more responsible investing. The industry is heading towards responsible capitalism, possibly leading to the most fundamental change to the adviser and asset management world for a decade.

Investors globally are focused on allocating to funds that meet their personal needs and principles, a global investor study has found. The research surveyed over 23,000 people who invest from 33 locations globally. Amongst other things, the results show that people feel overwhelmingly that as shareholders they should have the power to influence the companies they are invested in.

The European Commission voted to include nuclear energy and natural gas as environmentally sustainable investments in a new green taxonomy scheduled to take effect on January 1^st 2023. “As the Commission believes there is a role for private investment in gas and nuclear activities in the green transition, it has proposed the classification of certain fossil gas and nuclear energy activities as transitional activities contributing to climate change mitigation,” the statement said.

Since the SFDR regulation came into effect in March 2021, only a small fraction of the universe of fixed-income funds have been classified as Article 9. 

Carbon removal plays a huge part in meeting The Paris Agreement’s goal of keeping global warming below 1.5 degrees Celsius. In 6 years, the Carbon Capture and Sequestration Market is predicted to be worth $7 Billion Dollars, and investors are keeping a keen eye on these eleven carbon-removal startups to be poised for success.

Carbon emissions continue to trap our planet with heat, leading to climate change and global warming. In one way or another, be it in the food we eat, the clothes we wear, or how we get to work, we add to our individual carbon footprints through our daily activities. It’s one thing to make some changes to our lifestyle to reduce our carbon emissions output, but have you ever thought about the choices you make for your finances? Have you ever asked yourself where your money is going, or how well you actually know about the companies or corporations you’re investing in?

Conscious that growing investor demand for ESG financial products and fragmentation in how ESG rules are being read creates room for greenwashing, ESMA emphasised its intention to work closely with the national EU regulators to address, with coordinated action, greenwashing practices over the next two years.

Rising inflation and power price forecasts are powering impressive first-quarter updates from high-yielding, London-listed renewable energy funds.

Even though such buzzwords like ‘ESG’ don’t always feature in the names of Article 8 funds under the SFDR, their inclusion sends a strong signal to investors. Morningstar recently stated that if a fund’s name doesn’t include ‘ESG’ or sustainability terms, these issues are unlikely to play a central role in the strategy. It isn’t saying that these funds do not consider ESG factors, many are now doing so. But these factors are, more often than not, non-binding.

Recent research confirmed that the vast majority (82%) of asset managers said limited availability of data is a significant hurdle and costs are a major factor, as acquiring data needed to comply with SFDR doesn’t come cheap for asset managers. Data providers tend to charge extra for data beyond ESG scores, but that information is not always exhaustive for all ESG indicators.

Impact investing is more widely used, reflecting it is now starting to enter the investment mainstream. In particular, European investors and insurance companies are making bigger strides when it comes to public commitments to hitting net zero in carbon emissions by 2050 than the rest of the world, according to a new report.

This is an excellent overview of the major EU sustainability-related obligations for the financial services industry in 2022. This is relevant to fund managers, asset managers, banks, insurers, pension funds and financial advisers.

Regulators are set to take a tougher line on funds claiming sustainability credentials, but until then investors will have to decide for themselves.

Conversations around sustainable investing are becoming more commonplace. However, statistics also show that the majority of investors remain in the dark about ESG options, which suggests many advisors are not broaching the topic with their clients.

Social bonds issuance increased tenfold between 2019 and 2020, but can fund managers balance social purpose and profits?

Research found over half of investors aren’t aware of or don’t understand the terms ‘responsible investment’, ‘sustainable investment’ or ‘ESG investing’. But figures do show that ESG issues are of increasing importance for the majority, with nearly three-quarters (72%) concerned about environmental issues, 61% worrying about equality, and 65% having concerns about ….