The performance of SRI investments has regularly been called into question – as if it was not possible to generate alpha if you are looking for “virtuous behaviour” in the investment field – and fortified by some philosophical debates in the background about liberalism and the purpose of capitalism.
Now, the very rapid growth of “mainstream” ESG investments is a fact and is underpinned by a key question from the European regulators: how to achieve sustainable and inclusive growth? This structural trend is forcing the asset management industry to act quickly and adapt its way of investing.
The challenges of integrating ESG into investment funds have led to important organisational changes that impact people, tools, data and processes – at a huge cost, of course. However, there is now also a demand for cultural change in terms of the asset management company’s social responsibility. Impact investment is not just about green bonds, microfinance and climate transition solutions but also requires engagement by voting and creating a dialogue with the company in which the industry is investing.
An Important effect on distribution
This ESG impact is not limited to investments: it also has an important effect on distribution. Whereas, initially, ESG was driven by institutional investors’ demands, it is now clearly taking root in the wholesale and retail segment, a trend which is being accelerated by the regulations.
The ESMA project on integrating sustainability risks and factors in MiFID II, with the final report published recently, is a good illustration. The end recommendations to a client must reflect both financial objectives and ESG preferences. The same goes for insurance intermediaries and insurance undertakings distributing insurance-based investment products; they will be required to include ESG investment objectives in the suitability assessment.
This has direct and multiple consequences for investment managers:
- The importance of defining the underlying principles as the advisers integrate ESG in their investment advice.
- The capacity to deliver transparency, accurate reporting and documentation on ESG – in itself also clearly related to the data to which the investment firms have access.
- And finally, the question of the fund “label”.
Impact investment is not just about green bonds, microfinance and climate transition solutions but also requires engagement by voting and creating a dialogue with the company in which the industry is investing.
On this last subject, the existence of different local ESG labels, such as the implementation of the Belgian sustainability label this year, is also a challenge for an industry that has taken the cross-border route with products registered in several countries. How can local demand be reconciled with a more European approach to ESG?
For the asset management industry, the integration of ESG criteria in investments is not a project, but the beginning of a “journey”. Significant challenges both on the investment and distribution side and on the organisational implications should not be underestimated. On the other hand, this journey could also be seen as an important growth driver for the industry and a source of dynamism in terms of new solutions offered to different types of investors, as well as an opportunity for innovation through new tools and products.