April 1, 2019

Monday Morning Memo: The EU action plan on financing sustainable growth has been hollowed by the European Parliament

by Detlef Glow.

The European Commission has started an ambitious initiative with the commission action plan on financing sustainable growth. Even as this initiative was welcomed at the top level of the wider financial industry, there was some resistance with regard to the reporting duties for asset managers and mutual funds mentioned in the proposal. As a consequence of this resistance, the European Parliament dropped some of the more wide-ranging amendments favorable to conventional asset managers at a vote on March 28, 2019.

Even as the members of the European Parliament (MEPs) voted for a unified classification system—the so-called taxonomy of sustainable economic activities—this new taxonomy won’t be used as a reporting standard for all funds. Instead of forcing all kind of funds to disclose how their portfolios are positioned with regard to the taxonomy, the MEPs decided only funds which claim they are investing with an environmental, social and governance (ESG) or socially responsible investing (SRI) approach will have to report how the fund is positioned by using the taxonomy.

From my point of view, the European Parliament missed a chance to make the financial industry more sustainable with this decision. On the same page, it needs to be said that the new legislation will make it much harder for asset and fund managers to maintain “greenwashing strategies,” as this will be visible once the new reporting is in place. Nevertheless, conventional asset managers who claim to use ESG/SRI criteria in their overall approach will not have to publish this kind of reporting and may, therefore, be able to claim they have integrated ESG/SRI criteria even if they use them only in a very limited way. With regard to this, I would suggest that especially institutional and semi-institutional investors put pressure on their asset managers to disclose their scoring in the same way as specialist ESG/SRI funds.

All in all, it can be said the new taxonomy will be helpful for investors, as a unified classification system will add transparency to the market of ESG/SRI funds. Unfortunately, this legislation will not help investors to identify funds that may suit their needs with regard to their ESG/SRI performance from the universe of conventional mutual funds, i.e. non-specialized funds. This means investors may miss the best-performing fund for their specific needs. With regard to this, I could imagine that conventional fund managers who take their engagement in ESG/SRI seriously may start to report in the same way as their specialized peers on a voluntary basis, since this is an opportunity to gather assets from all kinds of investors or to differentiate themselves from their competitors, even as this reporting may come with an extra cost.

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

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