Sustainable finance investments continue to grow, but their effectiveness in driving tangible progress on global or local environmental challenges remains difficult to substantiate. Demonstrating the impact of sustainable investment remains a significant challenge, according to participants involved in producing a joint report by the Luxembourg Sustainable Finance Initiative (LSFI) and PwC Luxembourg.
“The exercise to measure progress remains still very, very challenging and cumbersome,” said Nicoletta Centofanti, the chief executive officer of LSFI, in a conversation with Investment Officer. “It’s my mantra now, since I started in 2021 – we need to be able to assess the impact of all these sustainable finance investments, right?”
While raising climate emergency alarm, the latest LSFI report, released last week, provides only a vague indication of whether sustainable investments are meaningfully addressing environmental concerns.
Consolidation of ESG ecosystem
“The positive trends that we observed were still there in terms of, for example, net inflows into ESG funds versus non-ESG funds,” said Frédéric Vonner, an advisory partner in sustainability at PwC Luxembourg who has collaborated on previous editions of the LSFI report. “Yet at the same time, there is a matter of consolidation of that entire ecosystem of ESG funds.”
“The data that we have here is confirming that consolidation and that big bucket of Article 8 disclosing funds, which embeds a huge variety of ESG ambitions and ESG strategies,” continued Vonner.
LSFI’s CEO paid tribute to the sustainable finance legislation in discussing the report. “This fantastic and somehow also complex and challenging framework that allows for disclosure and greater transparency, but we still see there are some challenges in the standardisation that doesn’t fully allow comparison in the measurement,” said Centofanti.
Retail investors drive green investments
Despite these challenges, retail investors have poured a net 12.6 billion euros during the first half of 2024 into funds with environmental, social and governance (ESG) objectives. This has contributed to what LSFI described as a “rebound in ESG funds”. Luxembourg ESG funds saw a 12.3 percent rise in assets under management since the second half of 2022, reaching 3,247.7 billion euros.
The report showed that institutional investors, by contrast, reduced their Ucits ESG investment by 7.8 billion euro during the same period. Despite this, Centofanti explained that institutional investors are in sustainable investing for the long haul.
“Everyone now is experiencing the climate crisis, nature loss, and it’s more and more clear and understandable to any individual, that this is happening and it’s real and it’s now.”
ESG private markets grow fast
ESG private market funds have grown remarkably in the past few years, with the report mentioning a compound annual growth rate of 95.2 percent from 2019 to 2023, a statistic that Vonner wasn’t fully comfortable with.
“I would still be cautious as to the very first years of data on that one,” said Vonner. He explained that the sustainable finance disclosure regulation “the regulation that helped us start engaging data from private markets” only became law in 2021.
Question of impact
Vonner spoke of issues limiting the effectiveness of sustainable investment. “We still see that the vast majority of the funds are ESG exclusion funds, and there still the question as to what is the actual impact down the road of those funds.”
ESG exclusion funds, according to the report, use one or more exclusion criteria.
Vonner extended his critique to private markets. “The vast majority of the assets under management are still managed using ESG integration.”
Methodological lack
ESG integration involves funds that say they include consideration of ESG factors in their investment processes.
“This is something which is still a question mark, from a methodological standpoint, as to what is the actual impact in terms of diminution of CO2 emission or how the funds actually support the slowing down of global warming”, said Vonner. “We don’t have, as far as I see, the proper means to properly understand on the ground what are the effects.”