Sustainability – the non-negotiable requirement
Sustainability has become the buzzword on everybody’s lips.
Whether it’s how you travel, how you shop or how you invest, seemingly every activity is considered with regards to its carbon footprint and ethicality. This is no bad thing, given scientists’ warning that if we raise global temperatures by more than 2°C (which is likely in the next 13 – 31 years), the world will become uninhabitable.
With more and more of us mindful of our own impact, so too are businesses acutely aware of the need to disclose their sustainability measures and demonstrate they are actively playing a role in lessening the impact of climate change, whilst still offering a stellar service.
In the investment industry, the move to “green” appears to have taken place almost overnight. In the last quarter of 2020, 215 new sustainable funds were launched, swiftly followed by a further 169 new sustainable funds in Q1 this year. This has been supported by 128 asset managers, collectively managing $43trillion in assets, signing up to reach net zero emissions by 2050; all fund managers active in Europe pledging to adhere to the EU’s Sustainable Finance Disclosure Regulations (SFDRs) and the industry as a whole moving to reach the Paris Agreement Goals.
While such a push is to be applauded, the speed of this change is such that there is an overwhelming amount of confusion around what any of these assurances and claims actually mean.
SFDR, CMIP6, IPCC, WTF?
The unintended consequences of this phenomenal shift towards sustainability are far-reaching:
1) End investors, already often overwhelmed by swathes of information about their funds have not been fully updated on what new terms and rules mean to their investments, resulting in a wealth of misunderstanding;
2) Regulation and enforcements surrounding what is considered sustainable are somewhat lacking, creating a murky land of supposed transparency;
3) Every fund manager now appears to be doing the same thing – and greenwashing is rife.
The vast majority of sustainable funds adhere to relevant sector regulation and cite the use of environmental, social, and corporate governance (ESG) criteria to evaluate investments or assess their societal impact. But what this really means is rarely explained, meaning consumers either have to blindly trust that their investments are truly being used in a sustainable manner, or undergo a huge amount of due diligence (requiring an impressive amount of prior knowledge) to really look under the hood of a fund. The fact remains that with most consumers unaware of the difference between E, S or G, this level of examination is unrealistic.
This lack of transparent information, driven, in part by a lack of relevant data, is often coupled with the dearth of stringent regulation around the area. Pledges to reach net zero are never investigated, commitments to consider ESG criteria are rarely probed and, more often than not, new sustainable funds are simply existing funds with a different, colourful, wrapper. The end issue for investors being that sorting the wheat from the chaff is a thankless and near impossible task; and for fund managers who really are investing sustainably, their voices and actions are often drowned out amongst the market noise.
How to stand out in a sea of green
Fortunately, all is not lost. While the industry is far from perfect, the opportunity to improve is within touching distance. Starting by supporting the consumer, there is huge scope to provide clear information on what sustainability is – educating the end investor on why they should care and clearly explaining how asset managers are making their investments work hard for them – in a truly sustainable manner.
Where regulation falls short, the industry has the opportunity to fix itself from the inside out – calling out good and bad practices; celebrating transparency and recognising where more needs to be done. There are several firms already doing just this, and the results in terms of market inflows, speak for themselves.
Finally, consumers are becoming increasingly engaged and discerning. A recent report from data analytics firm, Kantar, predicts that by 2029, over half of the global population will be “Eco Actives” –those who care about the environment and the role they play in protecting it. This in turn means that they will seek out businesses who share their values, fund managers who not only invest sustainably but who encourage and strive for a more sustainable and transparent industry.
We have all seen the rise in consumers voting with their feet and when faced with such an emotive and important subject, this behaviour is likely to be exacerbated. With so much noise about investing sustainably, this topic is becoming a hugely polarising issue – resulting in even more tribal and demonstrative actions and driving consumers to make the move from being vocal about what they want to taking physical steps to achieve it.
The net result being that industry players who clearly and proactively demonstrate their sustainable credentials, and those who provide consumers with the level of information and clarity they require, will not only help with the survival of our planet, but will also be those reaping those rewards.