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Europe leads on ESG as global rules sought

The rise of ESG investing creates an "urgent demand for global standards," says an organization working on them as the next U.N. climate summit nears.

An Italian photovoltaic plant ground-mounted with string inverters
An Italian photovoltaic plant ground-mounted with string inverters (AN/Sungrow EMEA)

GENEVA (AN) — The rise of ESG investing has led to an "urgent demand for global standards, especially on climate," according to an international organization aiming to do just that for the increasingly mainstream world of sustainability reporting as the next U.N. climate summit approaches in November.

More than 500 investors, regulators and others involved in environmental, social and governance investing mainly in Europe, North America and Asia urged the International Financial Reporting Standards Foundation, or IFRS Foundation, to develop a single set of globally accepted ESG accounting standards, according to a June update. The London-based foundation is taking comments through July on whether to set up an international board that sets sustainability standards.

IFRS sees a "growing need for companies to report on sustainability matters," Hans Hoogervorst, a retired Dutch politician and economist who chairs the foundation's International Accounting Standards Board, told a virtual conference last week. There has been an "enthusiastic response" to the foundation's drive for global sustainability reporting, according to Hoogervorst, based on a trust in IFRS that reflects a shared desire for global governance and due process.

The foundation aims to wrap up its preparations before the United Nations climate conference at Glasgow, Scotland in November. World leaders are looking to China, the United States and Europe to revive hopes of accomplishing the 2015 Paris Agreement goal of preventing average global temperatures from rising more than 2 degrees Celsius above pre-industrial levels, or 1.5 degrees C. if possible. Nations are expected to submit 2030 climate plans well ahead of the 26th session of the Conference of Parties to the U.N. Framework Convention on Climate Change, or UNFCCC, which is the platform for U.N. climate summits, known as COPs.

The Brussels-based European Fund and Asset Management Association, or EFAMA, which represents managers of 18.8 trillion euros in European investment funds, said it is encouraged that the European Union's push for standardization of sustainability disclosures at a global level appears to be gaining traction under U.S. President Joe Biden's administration.

Unlike the United States, the E.U. is adopting standardized definitions in a Taxonomy Regulation and standardized processes in a Sustainable Finance Disclosure Regulation that aims, in part, to prevent greenwashing by companies that appear environmental to drive advertising and revenue. The Swiss Financial Market Supervisory Authority plans to require the largest Swiss banks and insurers to report potential climate-related financial risks and disclose how they will respond.

In April, the European Commission proposed a Corporate Sustainability Reporting Directive to introduce more detailed requirements and lower costs. Due to be adopted by October 2022, the draft would amend existing requirements under a Non-Financial Reporting Directive for all large companies, including private ones, and companies listed on E.U. regulated markets other than micro-enterprises. It also is intended to help with the development of international standards.

"We are looking forward to having an international standard set because it's something that the United States is also supporting since Biden is in place," EFAMA said in a statement to Arete News. "And so we're hoping the IFRS set standards that will then make it easier for investors to compare products in the global market."

The best measure of emerging standards will be how quickly and widely they achieve positive impacts that investors want, according to Nicolas Pelletier, a senior investment manager in charge of global equity investments, ESG and impact investing at Reyl Private Bank in Geneva. "For me this is a slow process, a slow evolution. So, it’s taking a lot of time,” he said in an interview. “The key question is: Is it enough, is it fast, is it implemented correctly all across Europe?”

The E.U. mainly deals with environmental and climate aspects, said Pelletier, whereas European discussions on social and governance aspects tend to be “quite complex” and “many investors are not comfortable” trying to come to terms with them. It also was “quite surprising” and significant, he said, when the Paris-based International Energy Agency told governments that adhering to a 1.5 degrees C. limit will necessitate an immediate end to all new coal, oil and gas projects.

“More and more of our clients want to have a positive impact. For me it’s the positive evolution of society,” Pelletier said, though some ESG investors seem to “want to do it just for business purposes, not because they really believe in it.”

'More awareness for going green'

Ahead of his trip to Europe starting this week — his first foray abroad as president — Biden wrote in an opinion article published in the Washington Post that "with the United States back in the chair on the issue of climate change, we have an opportunity to deliver ambitious progress that curbs the climate crisis and creates jobs by driving a global clean-energy transition."

Climate activists and shareholders recently notched some wins in pushing for more accountability and responsiveness among some of the world's biggest multinationals. Central bankers also are exploring how to take immediate immediate action against climate change-related risks.

The Bank for International Settlements, based in Basel, Switzerland, gathered the heads of central banks, International Monetary Fund chief Kristalina Georgiva and other finance leaders for a first global virtual conference last week on how to deal with "green swan" risks — potential massive disruptions from climate change that could lead to the next systemic global financial crisis.

European asset managers anticipate that the recent surge in ESG investing will continue despite the coronavirus pandemic, which has shocked the global economy but elevated the need to address climate risks, labor inequities and corporate accountability. Among investment funds regulated at the E.U. level, equity and bond ESG fund assets rose 197% and 181%, respectively, due to new funds and use of ESG criteria in existing funds, EFAMA reported.

Assets in ESG funds reached 1.2 trillion euros by the end of 2020, while net sales of ESG funds rose to 235 billion euros in 2020, up from 19.5 billion euros in 2016, EFAMA said in its ESG investing report a year into the pandemic.

Europe’s ESG investing lead made for a big first-quarter rise in demand with US$146.7 billion in net purchases, according to Morningstar industry data. The U.S. and Asia, not including Japan, had US$21.5 billion and US$7.8 billion, respectively.

"The global pandemic has not shifted this trend in a major way. We do see a continuous increase in sales, in assets of ESG funds, as well as the interest of investors," Vera Jotanovic, a senior economist for EFAMA, said in an interview.

"The investors have maybe seen the performance of ESG funds has not suffered particularly during the crisis caused by the global pandemic," she said, "which maybe gives them more trust that there is no trade-off between sustainability and investment return, and this is why they keep on having the interest."

Asset managers and investors in European nations, particularly Finland, Germany, the Netherlands, Sweden and Switzerland, have pushed the continent to the forefront of sustainable investing, with a primary interest in climate-related issues ahead of the "social" component that revolves around decent labor practices or the "governance" interest based on accountability and transparency.

That also reflects the E.U.'s legal commitment to long-term climate neutrality, but Biden is making climate a priority. Noting that EFAMA did not analyze any data to explain the growing interest in ESG investing, Jotanovic instead reflected on her own industry background.

"We’ve just seen more awareness for going green, for being sustainable, of not only the existing investors, but also the new generation that are coming and starting to invest who are actually seriously considering these reasons, and prefer that their investments, and that their finances, do a good cause for this world," she said. "And I think this is also contributing in this increase. We have, let's say, new generations that are educated in this sphere, and really caring for sustainability of our planet, and in what state we're going to leave this planet."

David Uzsoki, a sustainable finance lead and senior advisor in Geneva for the Canada-based International Institute for Sustainable Development’s Economic Law and Policy Program, noted the flurry of interests and lobbying among competing stakeholders over the E.U.’s new taxonomy for “green” and "non-green" activities.

“There was a lot of lobbying from various industries who wanted their activities to be classified as green. That created tensions sometimes with the working group that was trying to follow a more science-based approach,” Uzsoki said in an interview.

“Also, member countries had differing interests, which made the negotiations more challenging," he said. "For example, France wanted to classify nuclear energy as green, while Eastern European countries pushed for the inclusion of gas power in the taxonomy. There were also a lot of discussions on how to include forestry-related activities. Agriculture was another challenging area that created a lot of frustrations during the negotiations.”

Like Pelletier, Uzsoki observed that the E.U. has until now mainly concerned itself with climate considerations. “Climate really is the starting point," he said. "Countries normally start with climate risk, then they go to sustainability risk.”