ESG – Third party information

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 ….