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.
In comes the EU Ecolabel!
As part of their Action Plan, the EU are committed to ‘Creating Labels and Standards for Green Financial Products’, and we saw considerable work from them in this area in 2019 – specifically with a focus on the redevelopment of the EU Ecolabel. The EU recognizes the importance of labelling schemes “for retail investors who would like to express their investment preferences on sustainable activities [and] could facilitate retail investors' choice”, and the intention is that this should help.
However, can and should this one label be enough, and replace the others?
To help customers detect “greenwashing” we’ll still need voluntary labels
What we know from the proposed technical documents is that this too will be a voluntary label and one that looks challenging for a number of current funds to achieve. Further, the current iteration of the guidelines may result in only a small range of funds being eligible.
While the need for an ambitious label is essential, not least to ensure the funds are not ‘greenwashing’, at the same time those funds with companies which may have the greatest potential to bring about the largest environmental changes but which fail the restrictive exclusion criteria, look to be excluded. The EU are still conducting rounds of feedback, so the final criteria are not yet confirmed, but in the current form the label may not provide enough choices of funds to help retail investors, and at the same time provide sufficient investment in companies to bring about necessary changes.
With this in mind, the place for the other labels, with different criteria but that provide external verification for the ESG/environmental credentials of funds, look set to remain in order to help customers express their investment preferences, and to drive the necessary investment to achieve the EU’s goals.