Global asset managers appreciate the framework provided by the green investing taxonomy and SFDR, even if more needs to be done to flesh these out. There is also awareness that Asia is central if global environmental and social concerns are to be addressed. These were some of the broad themes from the “Disclosure Regulations & Their Impacts” panel at the recent Luxembourg for Finance Sustainable Finance Forum.
“My legal compliance colleagues are always quick to point out that SFDR [sustainable finance disclosure regulation] is not a tool for product classification, but we’ve seen that clients are really telling us what they they think about article six, eight and nine products,” said Ewa Jackson, director of sustainable Investing at BlackRock. Nor did the Commission intend that classifying investment products under SFDR as having no green investing ambition (article 6), as light green (article 8) or dark green (article 9) should become a de facto labelling scheme. Despite that, this appears to be what is transpiring.
Facts on the ground
Yet ultimately this is solid information that investors are finding useful when making their ESG investment decisions. “We conducted a representative study across a number of European clients, and we saw the majority had signalled that were that they would choose article eight and article nine products over article six alternatives,” said Jackson.
Asia is making the climate
Yet for this change to have genuine global impact on environmental and social sustainability, these trends will need to be felt fully in Asia, home to two-thirds of the world’s population and the global manufacturing hub. “Multinationals from Europe and North America are creating demands on Asia through their supply chains, and there are stakeholder pressures building from within Asia through the high-net-worth market,” said Dr Kalpana Seethepalli, Director of ESG for Asia Pacific of Deutsche Bank.
She pointed out that “the region remains dependent on fossil fuels” but adding that the Asia-Pacific region has the largest renewable energy market in the world “with more than 55% of renewable energy capital expenditures, amounting to more than $700bn projected over the next three to five years.”
Similarly, on the social side, there is a lot of ground to cover regarding worker health and safety, even if there is pressure to change this. She also noted that the shift to a greener economy could impact some of the world’s lowest earners as economic models mutate.
EU needs to think global
Seethepalli is hopeful that European policy makers will embrace the challenge of taking the whole world into account when making rules. The “Brussels Effect” is a well-documented phenomenon whereby EU regulations become global standards, and a similar pattern is emerging for ESG investing. “There’s a lot of heterogeneity in the market, so we can’t create a regulation in Europe which is at complete odds to what is happening globally.” That said, she appreciates that the “gold standard of the EU taxonomy” is useful as a pace-setter, even if “there are practical issues with it and the applicability of it across industries.”
Kalin Anev Janse, chief financial officer of the Luxembourg-based European Stability Mechanism, underlined the central role played by Europe in this global movement. He said that the ESG investing market had doubled to $2trn in the last 11 months, after it took 13 years to achieve the first trillion.
“Almost 60% of this market is in Europe, with only 17% from North America and Asia-Pacific is around 20%. And if you look at the dominant currency, it is the euro,” Janse said. He recognises the responsibility. “As this market is so big globally, we need to take a leadership role in this space. And if you look at the EU taxonomy, this is the first global regulation to appear in this market.”
Greenwashing threat
Through all of this, Seethepalli is particularly keen that accusations of ESG mis-selling should not derail these efforts. She is in favour of “building credible material and quantifiable KPIs because we believe that greenwashing is a huge issue,” she said. “Right now, companies are disclosing something, disclosing anything just to check the box. But that needs to be stopped.”
“In some cases there is a lack of data, in others an overabundance, but the challenge is to ensure this information is robust,” said Jackson. However, she said she is optimistic that the market is moving in the right direction. “Four or five years ago the lack of data was actually a big obstacle to creating sustainable investing products,” but now she sees considerable improvement and helpful work by the Commission to expand the scope of the taxonomy.