This article is one in a series of thought leadership pieces written for Responsible Investor by members of the European Commission’s High Level Expert Group on Sustainable Finance. To see other HLEG coverage, see here, or to comment, visit our discussion page.
A truly sustainable financial markets system is one which embeds environmental, social and governance considerations in its return-risk analysis. It bases itself on a more inclusive stakeholder model, rather than a narrower, short-term shareholder one. Investing in companies which can plan for and reduce long-term risks, while meeting the challenges and expectations of markets, means being able to attain profit in a sustainable way. There needs be no trade-off between returns and values, between performance and impact. This approach is not new but it demands a structural change in the way finance is conceived today. Sustainable and Responsible Investment (SRI) represents an important lever for making that change.
SRI is a long-term oriented investment approach which integrates ESG factors into the research, analysis and selection process of securities within an investment portfolio. It combines fundamental analysis and engagement with an evaluation of these ESG factors to better capture long-term returns for investors, and to benefit society by influencing the behaviour of companies. To this end, Eurosif strives to promote SRI as a key part of policy-making and raise awareness throughout Europe of more responsible investment practices.
A standard at a European level, not only for green bonds but for SRI products, would be very interesting and is much needed
Today, SRI has come to the fore of strategic investments and is increasingly recognised as that part of finance which can help make a difference even beyond returns. It can contribute to solving some of the more pressing issues, which are so much a part of the international debate about more sustainable economies and more resilient businesses in the context of a general increased awareness of climate change and its impact.
We have seen a very interesting evolution in the understanding of SRI throughout the years. Eurosif has contributed significantly to streamlining the approaches that the industry entails. Practitioners apply at least some form of extra-financial evaluation in their portfolio – though this does not necessarily entail meeting the requirements of a specific strategy. The different categories of SRI strategies have helped a great deal in the development of the industry while being, to some extent, a reflection of the lack of unified parameters indicating what constitutes an SRI product.On a positive note, this ‘void’ has left ample room for investors to experiment with the development of products, reflecting the needs of their clients, legislative requirements at a national level and focusing on specific themes and trends. And yet, the belief that the existing product offering might be suboptimal still pervades and, to some degree, hampers the industry in its developments.
The HLEG, has so far done an excellent job in terms of taking stock of those elements which, though structural in the financial system of today, can be improved to fund society’s long-term needs, while transitioning to a climate resilient economy. Some of the recommendations on definition alignment and with specific reference to SRI are particularly instrumental to delivering a sustainable financial system for all. Focusing on a classification of assets and products at a European level, able to encompass the definitions of sustainability with a view to impact, is of critical importance and would address one of the challenges of the industry as highlighted in Eurosif’s 2016 SRI Study.
Being able to determine a standard at a European level, not only for green bonds but for SRI products, would also be very interesting and is much needed. Since its inception, Eurosif’s Transparency Code has represented the framework of reference for labels in Europe. To date, over 700 funds subscribe to the Code. Eurosif and its membership are proud of the industry’s recognition and will be working towards further shaping this important chapter for the industry.
Properly tackling the issue of disclosure complements the notion of a more transparent and sustainable financial system. Eurosif has always been a strong advocate of more transparency for both investors – the Transparency Code being a great example of that – and issuers. In our Capital Markets Union Action Plan, we stressed the need for a greater degree of transparency, via mandatory ESG disclosure, as a basic requirement for long-term sustainable investment in the CMU context, but also as a key factor for financial performance of European issuers. The lack of guidance in the reporting space to date has increased the level of opacity in the exchanges between investors and issuers, deeply affecting the ability of the former to make a correct analysis for the investment decision. In view of the lively debate around climate disclosure that has occupied much of the recent months, we would consider it a more than encouraging sign to be able to have clear standards in this sense for both issuers and investors.
Flavia Micilotta is the Executive Director of Eurosif, Europe’s sustainable investment forum.
To give feedback on the group’s interim report, published in July, see here.