2020 Sustainable wish list for Responsible Investors
2016 saw two major starting points, the “2 Degrees Initiative Paris Agreement” (2degrees-investing.org) and the “2030 Agenda” (sustainabledevelopment.un.org) that describe the different objectives to limit the global warming and implement the sustainable development way of living. Despite these important steps, COP25 was a big disappointment, the Amazon rainforest and Australia are burning. Carbon emissions are at an all-time high, and so are global temperatures.
The good news is that, at the start of 2020, the new European Commission is asserting its ambitions in terms of financing the energy and environmental transition. The European Union (EU) wants to encourage the direction of an increasing flow of funding for green assets. The novelty is the Green taxonomy, a classification system for environmentally sustainable economic activities, or the establishment of a common language within the EU, in particular to limit or even avoid accusations of “greenwashing”. This will lead to a regulation in term of what should be done within the investment process in order to be ESG (Environment, Social and Governance) compliant and what has to be disclosed to clients.
This taxonomy, regulating the “to dos” of financial institutions in terms of ESG investing, with commonly defined and mandatory metrics, will take time to be really effective.
In the meantime, Responsible Investors will have to deal with the numerous and diversified Investment Managers and their respective ESG Investment Processes. Some of the most committed have created their own internal taxonomy, while waiting for a common framework to which adhere. Via the GreenEthica platform for example, FIA Asset Management has been structuring the communicated information and available data in order to assess a score for the different assets it desires to invest in. For an accurate analysis, it is crucial that Portfolio Management professionals meet the Investment Fund Manager in order to state its alignment with the announced ESG Investment process, given the broadness of diversified range of metrics often used to set ESG criteria. The experienced results in fact, show a relative lack of structure, some efforts to score the different invested assets but using only few metrics, and even fewer sustainability report disclosures or any other documents showing a real implication at the ESG level.
Via GreenEthica, FIA A.M. demonstrates the relevance of a better understanding of ESG investments in order to show responsible investors how and why certain investments have been chosen, according to which criteria, and, more importantly, to prove their investments have a real sustainable impact.
It is understood, there is still margin for improvement. It is precisely in this respect that, at FIA A.M., we have elaborated a sustainable wish list for responsible investors:
- Enhanced ESG integration.
Unfortunately, the integration of ESG criteria within the investment process is basic for most of the Investment Managers today, and this is often leading to a weak impact on the sustainability. Related to the 2 Degrees Initiative, we suggest Fund Managers to disclose the concrete impacts of their investments.
- Better proxy-voting.
The corporate sector is miles away from properly addressing the climate challenge, and there will be no progress if powerful investors continue to show inconsistent voting practices. Every investor has to be engaged and show its approval or not to the management of the company.
- More SDGs alignment.
Except for clear thematic investment funds, it is still difficult to understand if a portfolio is aligned with the SDGs. The common language set by the SDGs should force all the fund managers to clearly identify which of them are positively contributing.
- Increased engagement of companies.
Companies are required to disclose carbon emissions, including targets for emissions intensity reduction and absolute level reduction, to have clear Paris-aligned transition plans. As of December 2019, still the majority of the fund managers are not disclosing a sustainability report showing the agglomerate metrics of the portfolio. We should be able to take this aspect into consideration.
- Rely on fully committed ESG managers
Nearly a third of investment managers are not committed to systematically consider ESG factors as part of their investment process across all asset classes. This is the more disappointing if we consider that Responsible investing can lead to better financial outcomes. Integrating ESG factors will naturally exclude “bad companies” and will push them make a sustainable transition.
For this and other reasons, 2020 will be a milestone year for responsible investments, opening to new approaches and new challenges However, we are convinced that convinced that both deep research and effective analytics will remain the two main pillars for an efficient ESG portfolio management for investors.
Head of Portfolio Management, FIA Asset Management