PLACE FINANCIÈRE & MARCHÉS — Fonds

Contribution - Alfi

Client preferences already drive sustainable investing



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Natalie Westerbarkey head of EU public policy chez Fidelity International. (Photo: LaLa La Photo)

Sustainable investing has become the new norm for the asset management industry. The integration of ESG/sustainability factors by asset managers is already a reality and mainly a response to client demand in Europe and increasingly so in Asia.

Asset managers operating in Europe now view the integration of ESG criteria into their investment process increasingly as a natural element of their stewardship responsibilities: they score investee companies against E-S-and-G criteria based on company reports, external data providers and after assessment, internal investment professionals arrive at a rating.

It is now common practice that institutional investor clients select asset managers not only based on performance, but also on ESG-­ related capabilities; for retail investor ­ clients, asset managers – including Fidelity – are launching new sustainable funds to meet growing client demand.

Consequently, asset managers are already looking to identify clients’ ESG preferences through the distribution and investment process.

Active asset managers even go beyond: through the engagement with investee companies, they aim to have an impact on how well companies apply ESG criteria in their respective industry sectors, so to reduce investment risks and enhance returns. As such, managers perform their stewardship duties by representing the interests of asset owners and transform client sustainability preferences into the business behaviour of companies.

MIFID II’s crucial role

MiFID II will play a crucial role nevertheless, although clients are driving sustainable investing already: enshrining common sustainable finance distribution principles into law has multiple benefits. Firstly, it may lead to greater standardisation related to client preferences (demand side) and hence support the mainstreaming of the integration process by asset managers (supply side).

Secondly, it may promote investor education, which is a key prerequisite so that clients are able to express their preferences. They can only make informed decisions based on their level of ESG knowledge to exercise choices. The public sector at EU and member state level plays a significant role through enhancing financial literacy of young people by providing independent and holistic information to citizens.

Retail clients may then have greater incentives to start saving early for their retirement if their assets are invested into sustainable financial products. It is therefore helpful that not only AIFMD and UCITS, but also the IORP (2nd pillar occupational pensions) and the PEPP (3rd pillar personal retirement savings) require the assessment of clients’ sustainability preferences.

EU eco-labels, an important too

The development of EU eco-labels for financial products will be an important tool for asset owners to express their sustainability preferences and helpful for asset managers in the distribution process. Labels should be easily recognisable for consumers. Therefore, the development of a label that indicates the sustainability of an investment fund on a spectrum, range or a ranking system is preferable.

Similar to the energy label utilised in the property sector, which consumers find easy to understand. Investor clients could then choose the level of sustainability or impact their investment fund should have on a range of 1 to 5 or 7, or a spectrum from red-amber-green like in the real estate sector. A major advantage of designing the eco-label this way is that clients can truly drive the development: it also allows asset managers investing in all assets and through active engagement to improve the ESG performance of companies and the fund. As a result, it would have a positive impact on sustainability, aiming also at reducing investment risks and enhancing financial performance.

The need to act jointly

MiFID II, however, will not be enough. The EU can only reach its climate and sustainability targets if the global community acts jointly. The EU efforts to coordinate a global approach are essential. Also, IOSCO – through its Sustainable Finance Network – and other global initiatives can play a key role in this process through the creation of a level playing field for asset managers and the development of internationally consistent standards with regards to sustainable finance policies.

With or without MiFID II – the fact that asset owners, both retail and institutional clients, are already demanding sustainable finance investment products is a positive development; and with MiFID II a common approach to identify client preferences will be made easier for distributors.

More news on the fund industry in  Paperjam’s Alfi  supplement.