Guest Blog by ALFI, a Nicsa partner. The Association of the Luxembourg Fund Industry (ALFI) represents the face and voice of the Luxembourg asset management and investment fund community.
The following article was written by Michael Maldener, Managing Director & Conducting Officer at Nordea Investment Funds S.A. Nordea Asset Management is a member firm of ALFI.
For several years, sustainability and ESG-tilted investing has been seen as niche, but now it has entered mainstream. What was potentially seen as a predominantly European crusade, has become a global and performance theme, fostered by the pandemic, social and environmental crisis awareness, reaching all parts of economic value chains and with profound impacts for our future society. A view through the lens of Luxembourg, the European epicentre for asset management.
Figures can hardly be neglected
It’s true, Europe is at the forefront when it comes to sustainable investing. Looking at 2020 year-end figures published by Morningstar, European assets in “sustainable funds” amounted to more than USD 1.3tn, about 5 times the assets in the US, the runner-up. But at the same time, we see significant growth rates in the US, suggesting that the sleeping giant is waking up.
Is it because of greater awareness, triggered by the pandemic and social issues surfacing more, or is it because of the environmental and especially climate challenges becoming more prominent? It’s probably a mix, but also the awareness that the asset management industry is essential in addressing the societal challenges at hand. Its sheer financing power is understood as the catalyst for global change for the better, towards more sustainability.
What’s happening in Europe?
In Europe especially, policymakers and governments have taken concrete actions to drive the agenda set by the Paris Agreement and the UN SDGs forward. A set of regulatory initiatives was launched to oblige the financial industry to take action towards sustainability. However, one should not make the mistake of thinking that its impacts will remain within Europe. As a global asset management industry, the impacts are also global as we invest globally, engage globally, and are responsible globally.
Deeply rooted in the Luxembourg asset management ecosystem, the second-largest investment fund hub in the world following the US, we at Nordea Asset Management, and other European as well as global asset managers, have taken action. Classifying our product ranges into different sustainability classes following the very recent entry into force of the Sustainable Finance Disclosure Regulation was the first concrete step from the regulatory agenda. Having integrated ESG considerations for many years, we welcome the standardised disclosure as a step in the right direction. And this step, now being taken by the entire industry, will bring greater transparency and over time, comparability for investors. Luxembourg, with ALFI in the frontline, is fostering a constructive dialogue among stakeholders, supporting the establishment of market guidance, pushing the sustainability agenda and thus assuming its responsibility locally.
But yet again, it’s not only about Luxembourg or Europe as investments are made globally. It’s also about the asset managers beyond European borders, them being international giants or small boutiques. To illustrate why small boutiques are also crucial, let’s look at a brief example. We at Nordea work with several boutique managers across the globe in our product range. For some of them, as in the US, the regulatory wave and related requirements are all new. But we all share a common goal to make investments matter and thus engaging and aligning with sustainability matters is essential. So, all of a sudden, a European initiative drives impact globally.
The above, along with the following steps to be taken by the industry, coupled with increasing and increasing-only investor education and the demand to contribute actively to their own future will drive change in societies and address environmental challenges without a doubt. But is it happening fast enough?
The winners of tomorrow
It’s not a big revelation that human beings – and certainly those within the financial industry – need incentives, not only financial but also moral or societal incentives, to change and adapt. In the financial world, such incentives are often, if not always, linked to return, performance and reward. So how to make ends meet?
The simple answer is: investing with sustainability in mind pays off, not only morally. The NYU Stern published a meta-study in February this year examining >1,000 individual research papers issued over the last five years on the correlation between ESG-tilted investing and financial performance. Unsurprisingly, their findings speak in favour of sustainable investments. The research shows that taking sustainability factors into account can result in enhanced performance, which provides down-side protection especially during a crisis and becomes more marked over the long term. But the study also confirms that ESG disclosure alone is not driving performance: simply claiming to take ESG and sustainability seriously does not do the trick – it must be truly embedded into investment approaches, organisations and their cultures to provide returns with responsibility.
And isn’t it also logical? To provide return to our investors today but also tomorrow, we must also identify those investments performing in the future. So imagining a company developing a service or product that is solving the social or environmental problems going forward or is seriously transitioning to a lower carbon footprint is probably also among the winners of tomorrow and thus, where financing should go to secure future performance. Admittedly, it sounds simple but it is complex and one can find numerous different approaches and angles to it, but they all usually have one thing in common. They put long-term conviction over only short-term yields which probably fits quite well with the industry’s goal to provide long-term value for long-term investments.
So it is a profound change we as an industry are facing and the sooner and faster the global industry adapts, the bigger the impact. It’s about determining our common and individual futures and thus the decisions to be taken about which way to go. The need for sustainable solutions in all areas of life won’t go away, it’s rather about whether we act with conviction or focus on the wallet. As illustrated, one doesn’t exclude the other and to the contrary, taking it seriously will grow the wallet long-term anyway. So, it’s a simple choice, isn’t it?
Observations contained in this work represent the best thoughts and opinions of individuals comprising Nicsa partner associations and do not necessarily reflect the views of Nicsa or any member organization. Nothing herein is intended to be or should be construed as legal advice. Contact your own counsel in order to obtain legal advice regarding legal or regulatory matters.