Sustainable investing

On the 10th of March 2021, new EU rules took effect for managers of sustainable funds or those that invest according to environmental, social, or governance (ESG) considerations. Now, these fund managers must report specifics of how they do their investing. The EU’s Sustainable Finance Disclosure Regulation, or SFDR for short, affects all asset managers that raise money in the EU.

Key takeaways from the new regulation:

  • The SFDR is expected to further shift market appetite towards sustainability-minded companies in their capacities as investees, borrowers, and issuers.
  • The application of the SFDR will influence businesses’ capital-raising activities. Companies prepared and aligned with the SFDR’s requirements will have a competitive advantage in the corporate finance market.
  • Companies can align with the SFDR’s requirements by preparing high-quality sustainability-related information and integrating sustainability factors into their existing and planned financing instruments.

Recently management companies like Blackrock and Vanguard have led sustainable and conscious investing by joining the 2050 net-zero initiative and adding $23trn to the cause. Seventy-three fund houses have commitments to support the goal of net-zero greenhouse gas emissions by 2050 or sooner. They represent $32trn AUM, over a third (36%) of global assets under management.

“We are on the front end of a profound, long-term structural shift in global investor preferences toward sustainability that is not fully priced into the market today and may therefore drive outperformance during a long transition period,” wrote BlackRock in May 2020.

Seemingly the industry is moving in the right direction being led by reputable companies and fund managers. Still, as with any progress, sustainable investing comes with its pitfalls. Creating the optics of being environmentally conscious can be far cheaper in the short term compared to implementing any meaningful change. This process was coined greenwashing.

It is fair to say greenwashing risks have risen considerably as this part of the industry expands rapidly. There are many potential risks for investors, who, with good intentions, inadvertently support funds and businesses representing pseudo-green marketing practices. It would be fair to assume that the countermeasure to imprecise terminology in this area would be implementing data, but in reality, the situation is far more complex. Often incomplete and misleading data is used to mimic good intentions. Data is supposed to be a tool for transparency. Every conceivable metric of a business or fund’s can be ranked, categorized, evaluated, and disseminated. Greenwashing may have previously been the domain of marketing agencies, but now, it is transitioning into the computers of data scientists.

One option to combat these concerns would be to further regulate companies claiming to uphold sustainable investment values. Another way would be to clearly define specific environmental goals like the aforementioned 2050 Net Zero pledge. Dr. Andy Sloan from Guernsey Finance also believes that focusing on carbon emissions can create genuine positive environmental change. Tracking the actual carbon content of a portfolio and its path to zero is a practical way of avoiding greenwashing through complexity while achieving the desired change. But Dr. Sloan also says that the private equity industry and private markets “need the comfort and confidence of a robust investment product, aligned with global standards”. The biggest worry is confusing legislation with a “MiFID II degree of complication”, says Sloan. For now, there does not seem to be an easy fix for greenwashing.

At Depowise, we are also working hard to play our part in this positive paradigm shift. Depowise is a modular end-to-end investment compliance software platform that supports, standardizes and automates the full range of daily operations performed by fund management companies, fund administrators and depositary banks. Our system supports implementing sustainable investment strategies for daily operational activities, gathering/processing/reporting data from/to 3rd parties and automatic investment compliance monitoring. Our securities master allows for the seamless addition of custom information. Based on which our investment limit monitoring system enforces your predefined ESG standards. With our rule’s engine, you can create custom controls for your employees that once again ensure that You follow the ESG standards throughout all levels of activity.

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