Robert Williams, pictured, says institutional investors already have a sense of responsible investing strategies
Photo: Mike Zenari
Will new EU rules on responsible labels make funds even more attractive to the average investor? Stephen Evans discusses the place of sustainability in the asset management industry.
Providing investment for the productive economy is good. Supporting projects judged to be sustainable is better. Hence the increased demand for mutual funds which follow responsible investment principles. But would new EU rules make these products even more attractive to the average investor?
An assessment of what makes a “responsible” investment is highly personal. For some, the project supported must respect a full range of environmental, social and governance (ESG) criteria. Other people are more concerned to just exclude backing for activities they personally find distasteful: the arms trade, hydrocarbon extraction, activities with complicated human rights records, etc. This is a growing industry whichever measure is chosen. A recent report for the Association of the Luxembourg Fund Industry put total such assets in Europe at €476bn in 2016 (double the 2010 figure), while the Global Sustainable Investment Alliance estimated total assets of $12trn.
How can the average investor make the choice that matches their personal ethical standards?
National fund industries and individual businesses have created their own ESG investing labels they hope will aid decision-making. Luxflag is Luxembourg’s contribution; a rating which takes a relatively strict, holistic approach.
The European Commission is considering a move to developing a pan-European system akin to the EU Ecolabel applied to a range of goods and services. An action plan launched in March talked of “a unified EU classification system”, “clarifying the duty of asset managers and institutional investors to take sustainability into account”, “enhancing transparency in corporate reporting” and maybe even relaxing capital adequacy rules for banks with greater responsible investing exposure. Initial proposals were published in May.
After having mulled these challenges for decades, the asset management industry has expressed its scepticism about this move. “Any mandatory sustainability requirement, especially regarding investments, would turn ESG into a ‘tick the box’ compliance exercise,” said the European Fund and Asset Management Association. “Market growth demonstrates that managers are already aware that sustainability criteria are essential elements in ensuring that they act in the best interest of their clients over the long term,” added Alfi.
“Institutional investors have a good idea of what responsible investing means,” explained Robert Williams, head of business development at NN Investment Partners Luxembourg, a firm which has specialised in responsible investing products for nearly 20 years. The likes of insurance companies and public and private pension funds are choosing these strategies to appeal to end-clients. It is easier for asset managers to sit down with these experienced clients and explain ESG strategies.
For individual investors, however, the challenge is different as most often they lack expertise. “Our strategy is to rely on distributors such as private banks, family offices, and independent financial advisors to explain choices,” Williams said. “If the EU can encourage an increased flow of ESG data from corporations then this would help us assist end investors make informed choices,” he added.
However, taking a lowest common denominator, administrative approach to fund assessment might just add to red tape without increasing client awareness.