An article on FTAdviser last month written by James Fitzsimons of KBI Global Investors, titled ‘Can I invest ethically?’, offered some interesting insights on socially responsible investing (SRI), often referred to as ethical, or ESG-principled investing.
Mr Fitzsimons rightly acknowledges that in spite of the broad choice available to investors with a general appetite for ‘sustainability’, there seems to be something important missing - the proper guidance for them to feel ‘enabled’.
The definition issue regarding sustainability-related terms (too many, too broad) keeps on rearing its head, despite the many positive developments which the industry has witnessed so far, and potentially hampers further growth.
In addition, and given the high level of attention sustainable finance has generated, not only from the market but also regulators, it makes finding a solution to this issue a particularly urgent one.
As SRI practitioners started eyeing the potential for sustainable investing years ago, less emphasis was put on getting alignment on terminology.
The danger with putting too much focus on coding an investment practice still in its infancy clearly did not appeal to practitioners who wanted to see the industry move out from niche to mainstream.
The total in assets under management Eurosif tracked back in 2003 in its first SRI study was €336bn and this had reached €11 trillion at the end of 2015.
The industry needs to face up to its success and contribute to the transparency and accountability of its practices to continue generating sustainable growth.
Eurosif, whose mission is to promote and contribute to the success of the SRI industry, acknowledged this need and back in 2004 devised a set of ‘transparency guidelines’ which constituted the basis for the ‘Transparency Code’ in 2008.
The code was essentially a framework for asset managers to be able to disclose the process followed in their SRI investment practices.
Today, about 800 funds subscribe to the code, which has also become the basis for most SRI product labels available.
The recent focus on sustainable finance by the European regulators has greatly contributed to the renewed attention to sustainable investment and re-opened the Pandora’s box of definitions.
The European Commission recently published an action plan on sustainable finance which follows up on the key recommendations made by the high-level group on sustainable finance, originally set up by the Commission at the end of 2016.
The Commission’s intention was to support the framing of a blueprint for sustainable finance as part of President of the EU Jean-Claude Juncker’s Capital Market Union (CMU).
As part of the action plan, the Commission highlighted the need to get alignment on a sustainable classification system that would help define what is truly sustainable, while also creating labels to guide investors and enhance corporate transparency.
A sustainability taxonomy represents an important starting point to define a sustainable framework for investments. Sustainable finance is at an historic juncture which deserves great care and attention to ensure it can deliver on its promise.