Regulations and key figures

encountered in every financial related structure. Indeed, education is always the key to change.

Therefore, some customs are also specific to each entity. Insurances companies begin to assess public risks such as health, pollution, climate change, etc. while asset management firms invest in high social and environmental projects. Banks establish sustainability screens on their portfolio and create new concepts such as “smart growth”.

To conclude, strategies for investors and best practices for companies emerged in the near past and more innovation can be expected in the coming decade (Strandberg Consulting, 2005).

Even though finance remains the most reluctant sector to operate the necessary changes for the ecological transition, many actions appear from the different actors involved thanks to a global wake-up call. Sustainable investment is one of the key ways to drastically modify our economy and is particularly present in Europe.

2.2. Sustainable investment in Europe

This second part of the literature review will be geographically focused on Europe. Europe, in this section, defines the European Union members. All the regulations, figures and investment opportunities illustrated thereafter concern the states members of the European Union (EU) except specific mention.

2.2.1. Regulations and key figures

Europe is part of the 195 signatories that ratified the Paris Agreement on April 22^nd, 2016.

Under this agreement, the European Union take the responsibility of reporting its efforts to mitigate global warming. The first and most well-known goal set is to hold the increase in the world’s temperature at least below 2°C and idealistically below 1.5°C by 2100. The second goal is to enhance our ability to face climate change impacts while not threatening food production.

‧

The third goal is to develop a way to make finance more in adequacy with our environment, which is basically the definition of sustainable finance and even more specifically green finance.

Hence, some European organs such as the European Committee start defining a new era for finance and investment in Europe. Indeed, sustainable finance, which is nowadays only a flap of finance, will become the definition of finance in the coming decades. The main goals of the incoming regulations will be to make the current market greener rather than making grow the green market side by side with the traditional market.

Following the final report of the High-Level Expert Group (HLEG) on sustainable finance published in January 2018, the European Commission (EC) gathered on May 2018 to deliver some proposals to make the first huge step for a greener economy (State Street, 2018).

These proposals aim to include more ESG instruments into institutions and retail investors’ portfolios and help them to understand better the level of sustainability of their investments. Named the “key pillars”, the main proposals are as follow. Firstly, more transparency is needed.

The new financial era will not be sustainable without being transparent.

As seen in the past and even still today, the lack of transparency on financial markets does not benefit the society from a social perspective.

Hence, financial institutions will have to disclose the way they include ESG in their investment strategies. Furthermore, it will be mandatory for asset managers to explain how the investment options they market as “sustainable”, “responsible”, “ethical” can actually be called like it. Secondly, to keep on helping investors to know which activities are environmental-friendly, some unified norms will be adopted named “EU classification system”.

Figure 3: Climate regulations timeline,

State Street

‧

Once this is done, clear advice will be provided by asset managers about ESG integration in the investment decision-making process, taking into account their potential customers’

sustainability preferences. Finally, investors will have the opportunity to compare their SRI assets with some benchmarks which will be provided with a clear methodology. These proposals should be definitely created and adopted by 2022. Not only the future portfolio will be affected by new regulations but the roots of the “problem” themselves. Financial institutions will need to operate some drastic changes on an organizational level. Indeed, if asset managers try to attract new customers with “new and innovative sustainability strategies” meanwhile they act inconsistently with the values they market to investors, within their own company, this will have an impact. The consequences will be a loss in credibility and loss in market share.

These new laws are not only a response to the Paris Agreement requirements but also to the increasing interest and pressure from investors to shift to greener finance (Schroders, 2016) So far, investors still have more concerns about integrating SRI assets in their portfolio than asset managers. According to the Schroders Global Investor Study in 2016, only 12% of investors would not consider having a longer position on assets if they have a positive environmental or social impact against 28% of advisers. Like any market, the “customers” make the market shifts, so the number 28% may decrease to match the investors’ exigencies. As evoked previously, Europe has always been a pioneer in sustainable investment and has the largest market share in SRI assets in the world. It has seen an explosion in the different SDG (Sustainable Development Goals) investing. Indeed, SDG investing (Figure 4) in Europe is usually classified based on the investment’s focus, going progressively from traditional (ESG focus is absolutely not a priority) to philanthropy (ESG focus is the priority, return on investment is not mandatory) (Eurosif, 2018)

‧ 國

立 政 治 大 學

‧

N a tio na

l C h engchi U ni ve rs it y

Figure 4: SDG investing, Bridges Venture Spectrum of Capital

The categories considered as SDG investing are the ones in between traditional and philanthropy: responsible, sustainable, thematic, impact-first.

As in the rest of the world, Europe follows some SRI strategies that can differ a bit from other parts of the world (Figure 4). The largest investment strategies are exclusions (€10,150bn), engagement and voting (€4,857bn), ESG integration (€4,232bn) and norms-based screening (€3,147bn) in 2017 (Eurosif, 2018). The growth in percentage is less significant than between the 2013-2015 period (Eurosif, 2016) which can be explained by the higher base assets that already included SRI in its portfolio. ESG integration strategy grows the most for the period 2015 to 2017 (+27%).

However, surprisingly, from the sample of Schroders Global Investor Study 2016, European investors seem to have less sensitivity than the rest of the world regarding ESG issues. Indeed, on average Europeans, when making investment decisions, give a level of importance to sustainability inferior to the rest of the world. For instance, “positive impact on the environment”

‧

has an importance of 6.5 out of 10 compared to 6.8 globally. Also, “positive impact on local social outcomes” gets the score of 6.4 against 6.7. Similar comparisons can be done for the other categories (good corporate governance, a good record of social responsibility and a positive impact on worldwide social outcomes) (Schroders, 2016). It is also interesting to notice the disparities within Europe itself. As an example, Italians, according to this study seem more sensitive to the positive environmental impact of their investments (7.1/10) than Dutch (5.9/10).

The Netherlands’ score on this topic is notably surprising as it is one of the most threatened European countries by climate change and sea level rise.

Investors’ sensitivity towards ESG issues keeps on increasing these past years. The most ESG-oriented investors are the millennials. Indeed, the younger is an investor, the more chances he has to be willing to invest in social and responsible assets (Schroders, 2016). And this is good news as in Europe, the SRI market is on an upward trend. However, in the past and still in most cases nowadays, a global offer has been provided to individuals who often do not match their specific concerns. But diversified sustainability themes options start to be offered to investors to meet their different interests, making the SRI market grow. Apart from ESG issues, the asset classes in which people want to invest also vary from one to another and need to be considerate by asset managers while building portfolios.