Sustainability has political tailwind - what does that mean?
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Sustainability has political tailwind - what does that mean?
Karen Wendt, SFTL President & expert in responsible, impact and sustainable investing
https://swissfintechladies.ch/sftl-authors/
Sustainability has political tailwind - what does that mean?
Sustainability has received political tailwind and is also being systematised by the EU. Until now, it was not very clear what exactly was meant by sustainability. The conceptual confusion around Environmental and Social Governance (ESG), Impact Investing, Mission Investing, Responsible Investing and Socially Responsible Investing (SRI) has now come to an end, at least in the EU. This is where the regulator, the European Security and Market Authority ESMA comes to the EU's rescue. ESMA let it be known that, in its view, ESG providers do not offer a consistent procedure for measuring ESG risks (ESMA 2021) and therefore ESMA is preparing a study of its own
to improve the consistency of these ratings. Recently, a study by the University of Zurich entitled "Aggregate Confusion" also concluded that the correlation between the ratings of different ESG rating providers is very low, meaning that some providers rate certain stocks as high in ESG, others very low (Berger et al. 2022). Both studies show that this is an important issue for investor protection, because how is the investor supposed to make an informed decision for sustainability if ESG rating agencies contradict each other. European financial market regulation has been a top priority since the EU-
Commission adopted its Action Plan on Financing Sustainable Growth (hereafter "Action Plan") in March 2018 (EUR_LEX 2018). Addressing the task of redirecting investors' capital allocations towards sustainability requires the involvement of the
financial industry, particularly here the institutional investors who account for the lion's share of assets under management. The Thinking Ahead Institute of Willis Towers found that the 10 largest institutional investors alone have 23.6 trillion in assets under management (AUM). Pension funds remain the largest group of asset owners with 58.1 percent of global assets, followed by sovereign wealth funds (SWFs) with 34.7 percent. This investor group is thus the decisive one when it comes to sustainability and impact investing.
These figures alone show that the help of these powerful institutional investors is indispensable in order to achieve the goal of redirecting capital towards sustainability. This requires product innovations, structured product and new financial instruments, as the mix of assets that exists on the market (shares in large companies, bonds, etc.) cannot be changed overnight. Therefore, a transition period and product innovations are needed. In order to achieve the 2 °C target of the Paris Climate Agreement alone, the EU Commission estimates that between 180 and 270 billion euros need to be invested annually (BMU 2023). This investment requirement can only be met with the help of institutional capital; public budgets are far too small for this (Lindenpartner 2023). They are increasingly using ESG rating models, but have not yet really discovered impact investing. However, this could soon change with the new requirements of the EU, in which, for example, companies must prove how many percent of their turnover they make with a sustainability issue.
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Karen Wendt
President of SwissFinTechLadies