August 31, 2020

Monday Morning Memo: The Missing Definition of Sustainability is Still a Hindrance for Investors

by Detlef Glow.

Looking at the actions taken by fund managers and promoters in Europe, it seems like sustainable investing or sustainability is the hot topic in the market. Nearly every company announces that they will or have integrated non-financial criteria into their investment processes or offer funds with a specific approach. On the other hand, it looks like investors are still somewhat reluctant to integrate ESG strategies into their portfolios, even though there are high inflows into so-called ESG funds.

One of the reasons for the reluctance is the fact that investors are still missing clarity on the criteria for ESG funds, as the fund industry and regulators have so far not found a clearly agreed upon definition for sustainable products. However, a clear definition could be the next booster for the already high inflows being experienced by ESG mutual funds and ETFs. This is especially true since new guidelines for the implementation of sustainable investments will be a required topic of discussion with retail investors come 2021.

A clear definition would also help institutional investors with their investment decisions, as a high number of professional investors will wait for clear guidance from regulators before they start to reallocate their assets or implement new strategies in their portfolios. Therefore, politicians and regulators should act as fast as possible on a sustainability definition. This would support the decision-making processes of professional investors and help fund promoters to offer the right products. In addition, a clear definition would enable all kinds of investors to identify products which are using greenwashing strategies, and such a definition should also set minimum ESG standards.

From my point of view, we still witness too much talk and too little “real” action from regulators and fund promoters in relation to sustainable investing, even as we see assets in ESG funds rising. But I doubt that the way sustainability is currently integrated in portfolio management processes will really lead to the change in thinking that is needed on all levels. From the consumers to the CEOs of all companies, all need to make less extensive use of global resources to foster a sustainable world.

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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