SUSTAINABLE INVESTING – FROM NICHE TO STANDARD?
Investors are increasingly considering environmental, social and governance (“Environmental Social Governance” - “ESG”) criteria when selecting financial products. Currently, mainly institutional and ecclesiastic investors are driving this development forward. In doing so they have to take account of legal or regulatory requirements that increasingly include sustainability aspects.
The European Commission has developed an action plan for sustainable finance in 2018, based on the work of a group of experts. The aim is to actively involve the financial sector in the goals of sustainable financing. Particular emphasis is placed on mitigating climate change. The action plan includes the following core measures1:
- Establishment of understandable EU standards in the classification of sustainable activities
- Establishment of an EU label for green financial products to help investors make their decisions
- Definition of responsibilities for asset managers and institutional investors
- Increasing transparency among companies. Mandatory information for issuers in capital market prospectuses regarding their ESG policy
- Anchoring sustainability factors in the regulatory requirements for banks and insurance companies
Disclosure requirements for pension funds of the extent to which environmental, social and corporate governance factors are taken into account in investment and risk management has already been implemented by the IORP Directive2. EU Member States must nationally enforce these European requirements by 13 January 2019. Statutory requirements are made, for example, in Germany and Austria in particular in the selection of assets (“according to ethical, ecological and social criteria”) and in the obligation to inform (“consideration of ESG criteria”)3. Comparable content-related activities are being developed in Switzerland by the “Swiss Association for Responsible Investments” (“SVVK-ASIR”).
These developments make it necessary to consider ESG criteria as part of a comprehensive investment controlling. This ensures that the defined specifications
in this area are met. In addition, corresponding ESG reports provide a decision-making basis for responsible bodies and, in addition, information obligations towards stakeholders can be met.
ESG controlling systems should be transparent and traceable in terms of methodology. The question of how a rating is assigned should not be a “black box”. A comprehensive database is a prerequisite that does not limit the asset manager's investment decisions, thereby affecting investment results. The comparability of “ESG ratings” in relation to a benchmark and the respective peer group is also an essential aspect that an ESG controlling should enable.
Our LMM ESG controlling is based with MSCI as a data provider on an internationally recognized system, with the world's largest available database in this area. We would be happy to advise you on how to establish an efficient and tailor-made monitoring and reporting system for sustainability.
1 Source: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance_de#committments
2 EU Directive 2016/2341 of 14.12.2016 on the activities and supervision of occupational pension schemes (IORPs)
3 Compare uA § 25a öPKG, § 7a dAltZertG und §144 dVAG