The labelling of ESG funds: is one standard enough?
Globally we are seeing a surge in interest in responsible investments. To match this growing demand there has been an explosion in the range of ESG-products which vary significantly in practice.
While responsible and sustainable investment strategies have been fundamental in our work for more than 20 years, globally we are seeing a surge in interest in responsible investments and for Environmental, Social and Governance (ESG) related financial products. This is most evident in the year on year growth in AuM in ESG products and in signatories to the UN-supported Principles for Responsible Investment.
Investment practices in ESG-products varies significantly
To match this growing demand, we have seen a relative explosion in the range of ESG products available by different managers, with many claiming various impacts and alignments with environmental objectives and other goals.
It can be difficult for customers to know if the purported objectives are being achieved
While many managers utilize similar language in describing their approaches, often incorporating terms like exclusions, ESG integration and impact - what this means in practice can vary significantly. This can make it difficult for customers to know what approach their funds are employing with regards to ESG and whether the purported objectives are in fact, being achieved.
There are a number of voluntary ESG fund-labels
To fill this gap, many investors, including ourselves, have sought voluntary ESG fund labels as a means to clearly demonstrate the ESG credentials of the fund to our investors.
Our DNB Renewable Energy Fund received the German Sustainability FNG Label and the LuxFlag Environment Label in 2019.
Now, with the EU Action Plan for Sustainable Finance’s new incoming disclosure requirements likely going a long way to filling the current transparency gap, in many ways the idea of fund labels seems superfluous. However, the full implementation will undoubtedly take a number of years, as will it take time for fund managers to develop robust reporting measures and for customers to develop experience with interpreting the disclosures.