sustainable finance

Europe’s fund and asset management industry, seeing rapid growth in investor demand for sustainable products, is asking EU policymakers for a robust and transparent new legal framework that clearly defines how ESG and sustainability ratings for investment products are determined.

BlackRock finds itself caught in a tug of war in US politics over its approach to sustainable investing.

On the one hand, there are Republican-led states that believe the world’s largest asset manager is hostile to the carbon-focused industry. On the other hand, there are Democrat-led governments that believe BlackRock is backtracking on its commitment to addressing climate issues. 

The growing complexity of Europe’s sustainable finance framework and a lack of clear guidance from EU supervisors is leading to a fragmented application of the benchmark EU regulation that determines which investment funds are sustainable and which are not. As a result, the sector is facing what Morningstar’s top ESG expert calls “The Great Reclassification”.

When it comes to sustainability, all actors, including the finance sector, need to develop a suitable level of understanding before policies and investment strategies can translate into impact, explains Nicoletta Centofanti, head of the Luxembourg Sustainable Finance Initiative, in an interview.

This IO Talks Luxembourg podcast episode with Corrine Lamesch, chair of the Association of the Luxembourg Fund Industry (ALFI), sheds light on the growing popularity of alternative investments in Luxembourg, addresses the complexity of ESG and sustainable finance regulation, and hears about the role of the grand duchy as a global distribution centre for financial products.

The European Union, under its taxonomy, requires SRI funds to declare what part of their portfolio is green by 1 January 2023, but there is still much work to be done to address the pitfalls in the EU’s sustainable finance framework, Triodos Investment Management’s Hadewych Kuiper and Nikkie Pelzer (photo) said in an interview. “Some asset managers prefer to classify their sustainable funds under Article 6” because it requires less reporting, making it cheaper.

One month after the EU ordered the investment sector to ask clients for their sustainability preferences, investment firms appear to show limited enthusiasm for complying with the new requirements as complexity around the EU’s ESG rules persists and greenwashing fears linger.

A recent study conducted by Boston-based State Street has found evidence of “green shorting”,  a phenomenon in financial markets where investors borrow shares of companies with a weak sustainability profile and sell them in the hope they can buy them back cheaper when the price declines.

The Luxembourg Sustainable Finance Initiative, a public-private body known as LSFI, has decided to create four new working groups to help the industry better come to grips with challenges posed by Environmental, Social and Governance issues.

The European Council and the European Parliament have taken an important step towards the implementation of a new sustainability reporting system in Europe. It concerns the Corporate Sustainability Reporting Directive, or CSRD, which requires companies to have their reported sustainability information independently verified.