March 10, 2019

Monday Morning Memo: ESG a new paradigm for the European Investment Industry?

by Detlef Glow.

Following the news about product releases and trends in the European fund industry, one may get the impression sustainable investing is the new hot topic in the industry since there are funds with a sustainable investment objective launched every week. Some observers may already see an inflationary use of the terms environmental, social and governance (ESG) and socially responsible investing (SRI). In addition to the specialist funds, an increasing number of asset managers state they have the so-called non-financial data integrated into their research and portfolio management systems so analysts and portfolio managers can use the data within their decision-making processes.

Especially the second point is kind of a concern for me since the use of the non-financial ESG-related data is in most cases voluntary; i.e. analysts and portfolio managers can use the respective data, but don’t have to take these additional data points into consideration when buying a security. With regard to this, one could speak about green washing or ticking a box when a request for proposals arrives.

From my point of view, this wouldn’t be fair since I strongly believe even those asset managers that allow their analysts and portfolio managers to use the data on a voluntary basis will have an eye on this and sharpen their rules over time; i.e. they may allow their portfolio management staff a transition period before they have to integrate the respective data on a mandatory basis in their investment processes. This is not just a wish from myself, as I strongly believe the integration of ESG will be an advantage for investors, because asset managers in the EU will also be forced to report about their activities with regard to the impact of their portfolios measured by the UN sustainable development goals (SDGs)  once the sustainable finance initiative of the EU is finally in place.

In my Monday Morning Memo: A comment on the sustainable finance initiative of the European Commission, I have forecasted that this initiative will be a driver of growth for the European fund industry, and we witness now this is at least the case with regard to the launch of new products. I also believe that initiative of the EU commission will drive fund sales in the direction of asset management companies that can show they are using ESG data to improve performance with regard to the SDGs since the initiative also includes a mandatory reporting with regard to this, as well as an educational obligation for advisors who will have to integrate sustainable finance into their counseling interviews with clients.

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

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