What does Sustainable Investing mean?

With the Sustainable Finance Disclosure Regulations (SFDR) coming into effect on 10 March, Oliver Oehri, Co-head of the ESG product group at FE fundinfo answers some key questions about Sustainable Investing; what it means, and how it will impact fund groups.

What trends are emerging in sustainable investing?

OO: “Sustainable investing is one of a number of similar terms that have arisen among investors in recent years, all of which broadly fall under the ‘environmental, social and governance’ (ESG) umbrella. While 15 or so years ago it was perhaps seen as a philanthropic or niche part of the investment world, today it has very much entered the mainstream, with investors increasingly demanding more and diverse ‘sustainable’ investing options from their fund and asset managers and in the UK, their financial advisers.

“Clients now expect and want to hear what sustainable investing options are available to them and in the year ahead we will see this trend only increase, with greater consolidation across the industry as asset managers and fund houses look to broaden their ESG offerings especially in line with reporting. As such we will see an expansion in ESG-related data propositions from providers, more diversity and clarity in ESG ratings systems and broader conversations happening between investment professionals and their clients about the precise details of their offerings. Fundamentally, these conversations about sustainable investing will be front and centre of any client investment plan, as important as returns, outlooks and any other key metrics with which we are already familiar on a fund’s factsheet.”

How is the landscape changing post Covid-19, and what does the future hold?

OO:“When crises of this nature come along it is natural to question age-old thinking and there is no doubt that the Covid-19 pandemic has sharpened investors’ outlooks around the economy of the future. With governments across the world promising to ‘build back better’ it is not surprising that this has filtered down into the microlevel and individual portfolios. In the immediate future, two important pieces of regulation in Europe – the Sustainable Finance Directive Regulations (SFDR) and the EU taxonomy for sustainable activities – will come into force very soon and will shape the direction of sustainable investing for the long term. Both of these are designed to provide investors with greater clarity over exactly what ‘sustainable investing’ entails, with the taxonomy in particular providing clear definitions around these terms. This will hopefully address concerns relating to greenwashing and address some of the conflicts around different investments and how they are classified.

“With greater clarity at policy level and increasing interest from investors, along with the potential of favourable landscapes provided by governments, we can only expect sustainable investing and the wider ESG industry to increase its position within the wider industry, to the point where it might be the case that every fund or investment will have sustainability at its core.”

What are the challenges and opportunities going forward for companies and their investors?

OO:“The immediate challenge for companies and investment firms with operations in the EU is compliance with the forthcoming regulations. Beyond that, companies will need to evaluate their investment processes and ensure they are fit for purpose in what is already becoming a crowded space. Being able to fully understand their investors’ interests will be crucial in order to meet their needs and will see the more sophisticated investment process becoming the more successful. It will no longer suffice to adopt a box-ticking approach for investors, where bespoke and flexible propositions will be expected. That said, even as markets have contracted throughout the Covid-19 pandemic, ESG and sustainable investing has continued its growth, so the interest and opportunity is firmly there for the adaptable investment company.

“From an end investor’s point of view there is certainly work to be done to fully understand what sustainable investing entails and what exactly their priorities are. No investment, asset or fund will be wholly ‘sustainable’ in every sense of the word, so investors will need to work out what factors are most important to them for each asset they hold. For instance, if an investor is wholly opposed to tobacco, how far does that opposition go? Supermarkets will sell tobacco, so are supermarket stocks no longer applicable? Undoubtedly it is a two-way street between investment company and investor, and the old phrase ‘Caveat Emptor’ is as applicable here as within any other walk of life.”