Canadians like to think of themselves as socially-minded citizens but sustainable investing (SI) is less important to Canadian managers than their UK and European counterparts (4.2 versus 4.0*) in the RBC I&TS manager survey. Similar to Canadian respondents, Asian managers also view SI to be less important than UK/European managers (4.0). This could change as investor interest in SI gains traction at a time of cultural shifts toward an increased focus on racial equality and climate change globally. SI is a particularly complex subject and the road ahead won’t necessarily be smooth sailing for asset and wealth managers as they work with regulators and the industry to manage this increasingly important strategy.
Regional differences in the importance of SI—an umbrella term that may also be referred to as environmental, social and governance (ESG) investing, responsible investing or socially responsible investing—are also reflected in a survey of investors from 27 countries conducted by asset manager BlackRock in mid-2020.1 The survey found that more than half of respondents consider SI to be fundamental to investment processes and outcomes. This is driven by investors in Europe, the Middle East and Africa (EMEA) “where we see greater rates of adoption,” while respondents in Asia-Pacific (APAC) and the Americas “appear to be in the early stages of this journey.”
Importance of Sustainable Investing
Force To Be Reckoned With
SI is “a major force shaping global capital markets and, in turn, influencing companies and others seeking to raise capital in those global markets,” according to the Global Sustainable Investment Alliance’s recently published biennial update.2 The report indicates that SI totaled more than USD 35 trillion in AUM at the beginning of 2020, a two-year increase of 15% (2018-2020) and a four-year increase of 55% (2016-2020).
- 55%
Four-year growth in SI assets
The BlackRock survey forecasts that such growth will continue as respondents plan to double their SI AUM in the next five years— rising from 18% today to 37% by 2025. The increase is most pronounced in EMEA, with respondents expecting SI to comprise 47% of assets within five years, while APAC and the Americas anticipate sizable increases as well. The global pandemic is not expected to hamper this growth; only 3% of respondents report plans to delay implementation of SI as a result of COVID-19.
A Challenging Transition
The projected growth in SI AUM may face some road bumps. “When it comes to ESG and sustainable investing, asset and wealth managers are experiencing numerous challenges in their ability to measure the right things and identify the right data sources,” says Frank Talsma, Director of Risk & Investment Analytics at RBC I&TS. “It is one thing to accumulate massive amounts of ESG-related data but it is more difficult to extract meaningful and actionable insights from this data. Strong analytical and reporting capabilities will be key to answering investors’ increasingly demanding questions on the performance of ESG funds and the impact of their investments on sustainability.”
SI currently operates within a broad, data-intensive environment where norms are largely non-existent and the industry is unable to function in a standardized, transparent and comprehensive manner. Numerous gaps exist in the availability and consistency of SI data, making it a challenge for investors to compare information. A unified data framework remains elusive but the transition is underway, with Europe at the forefront.
Trail Blazers
As part of its Sustainable Finance Action Plan, the European Union (EU) is implementing various regulatory initiatives, including the Low Carbon Benchmark Regulation, the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD), as well as the impending Taxonomy Regulation (see side bar). This regulation is designed to help manage SI in a more standardized way and address greenwashing. However, it is not an easy process and delays are already being experienced.
While Europe is blazing the trail on the regulatory front and the U.S. is showing increased interest in SI of late, other countries, including Canada, appear to be largely taking a “wait and see” approach before implementing a local regulatory framework. This may well change as governments and the industry become increasingly involved in international ESG standardization initiatives, particularly if the projected rapid growth in ESG investing materializes.
Facing ESG head-on in the EU
Going for Green
The European Commission is enacting a comprehensive range of regulation to help manage growing interest in SI as part of its Action Plan on Sustainable Finance, including:
Low Carbon Benchmark Regulation4
- Effective December 23, 2020
- Requires administrators of benchmarks in the EU (other than interest rate and FX benchmarks) to comply with new requirements for disclosing ESG factors
- Creates a common requirements framework that promotes consistency and leads to greater comparability among benchmarks
- Clearly states whether a benchmark pursues ESG objectives
- Generates greater transparency of a benchmark’s objectives
Sustainable Finance Disclosure Regulation5
- Effective March 10, 2021 (European Commission recently deferred the application date of the draft regulatory technical—so-called Phase 2—from January 1, 2022 to July 1, 2022)
- Imposes mandatory ESG disclosure obligations for asset managers and other financial market participants
- Aims to provide a level playing field for financial market participants and financial advisers on transparency in relation to sustainability risks, consideration of adverse sustainability impacts in investment processes and the provision of sustainability-related information on financial products
- Requires alternative investment fund managers and UCITS managers to provide standardized disclosures on how ESG factors are integrated at both the entity and product levels
- Generally applies to all asset managers, whether or not they have an express sustainability focus
- Requires additional disclosures for financial market participants within their websites, prospectuses and periodic reports
Corporate Sustainability Reporting Directive5
- Issued by the European Commission on April 21, 2021
- Amends existing reporting requirements of the Non-Financial Reporting Directive to bring sustainability reporting in line with financial reporting
- Requires large and listed companies to report according to mandatory EU sustainability reporting standards starting in 2024 based on fiscal year 2023 information
Taxonomy Regulation6
- Effective January 1, 2022
- Is the EU’s principal mechanism to address greenwashing
- Defines criteria for determining whether an activity is environmentally sustainable
- Requires various disclosures in addition to those outlined in SFDR
Sustainable investing is a factor that you ignore at your peril.
- Denys Calvin, Vice-President and Chief Operating Officer, Nexus Investment Management, Canada
After the Paris Agreement, basically every asset manager is introducing sustainable products or impact investment. I don’t think I can find an asset manager who is not working on this.
- Dick van Ommeren, Managing Director, Triodos Investment Management, The Netherlands
Sustainable investing is a six out of five for us. We are very passionate about it. It’s part of our core values.
- Stuart Alexander, Chief Executive, GemCap, United Kingdom
The reality is, and always has been, that investing in good companies is the best way to generate returns. And companies that are governed well, socially responsible and environmentally friendly, are good companies to invest in.
- Joe Hornyak, Executive Editor, Benefits and Pensions Monitor3
* Based on a 5-point scale where 5=extremely important and 1=not at all important
1 BlackRock, Global Client Sustainable Investing Survey, July-September 2020
2 Global Sustainable Investment Alliance, Global Sustainable Investment Review 2021
3 Benefits and Pensions Monitor, The Case for ESG, June 2021
4 S&P Dow Jones Indices, EU Low Carbon Regulation FAQ, December 22, 2020
5 KPMG, SFDR - A Snapshot, March 2021
6 BSR, What Business Needs to Know about the EU Corporate Sustainability Reporting Directive, July 6, 2021
