December 2, 2019

Monday Morning Memo: Europe Leads the Way to Common ESG Standards

by Detlef Glow.

Fund managers and investors are still often confused over the definition of environmental, social and governance (ESG) investing because there is no single definition of ESG. This is despite all indications that the integration of ESG criteria in all portfolio management processes is the inevitable future of the asset management industry. In addition to the lack of a single definition, there are also several different names and acronyms, such as ESG, SRI, impact investing, sustainability etc., with many of these terms used interchangeably in the literature of sustainable investment vehicles to describe the approach of the respective product. All these different descriptions come along with different methodologies underneath their product strategies, varying from exclusion to inclusion criteria, or from the so-called negative to positive screening, or respective mixtures of the two.

The lack of a common language between the different stakeholders from investors via the portfolio managers to the corporate reporting is a significant barrier to the growth of responsible investments and enables the so-called “greenwashing” (the use of unclear language to pretend that a company or a fund follows is sustainable) which can mislead investors.

In light of this, it is not surprising that regulators all over the world, led by the European Union, are looking into the topic of sustainable investing and setting guidelines and frameworks to identify practices (on the corporate level) and frameworks (on the fund level) to help investors identify funds which follow a sustainable investing approach.

From my point of view, the initiatives started by the European Commission and other local regulators, such as the Financial Conduct Authority (FCA) in the United Kingdom, will help to align the communication around sustainable practices and investing. Nevertheless, even as these new standards are a step into the right direction, it is already clear that they won’t be sufficient to eliminate all hindrances and greenwashing, so that it is foreseeable that these standards will be extended in the future.

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

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