EU Strategy on Sustainable Finance Views from a European asset management perspective

Transcription

1 EU Strategy n Sustainable Finance Views frm a Eurpean asset management perspective Cntents General remarks Prmting institutinal demand and fiduciary duty Time hrizns: the lng-term / shrt-term debate... 4 Barriers t lng-termism an asset manager s perspective... 4 Market benchmarks and sustainability Transparency:... 6 Standardisatin f reprting... 6 By cmpanies... 6 By asset wners / asset managers... 6 ESG Labels and ratings... 7 rue Mntyer 47, B-1000 Bruxelles Fax inf@efama.rg VAT Nr BE

2 EU Strategy n Sustainable Finance Views frm a Eurpean asset management perspective General remarks EFAMA is supprtive f the Eurpean Cmmissin High Level Expert Grup s ( HLEG ) aim t develp an EU strategy n sustainable finance. We believe that such an EU plicy framewrk culd help stimulate and educate in the field f respnsible investment and sustainable finance. As sustainable finance is a grwing, cmpetitive and innvative field invlving crss-sectr disciplines, we wuld welcme an EU plicy framewrk fcused n market-driven develpments. Glbal framewrk In this cntext, a future EU strategy n sustainable finance plicy bjectives needs t be aligned with glbal initiatives such as the COP21 targets and the Sustainable Develpment Gals bth f which will require a shift in current business mdels t accelerate investments in sustainable slutins. Rle f asset managers Asset managers manage the financial assets f asset wners with the view f maximising returns ver the lng-term. The clients f asset managers vary frm individuals t svereigns t endwments, charities, pensin funds and insurance cmpanies. Individuals, and institutins wh invest n their behalf, entrust their mney t asset managers wh seek t achieve their financial gals by investing in capital markets, cmpanies and infrastructure such as transprt links and hspitals (list nn-exhaustive). Asset managers als help t fund gvernments and are amng the biggest investrs, n behalf f their clients, in gvernment bnds. This helps t create jbs, supprt a strnger ecnmy and prvide infrastructure. Asset managers fiduciary business mdel dictates them t invest in capital markets and prjects based n their clients, individual and institutinal asset wners, investment guidelines and prfile, best lngterm interest. As such, asset managers seek t integrate the envirnmental, scial and gvernance ( ESG ) factrs, in their investment prcess t ensure they best prtect their clients investments ver the lng-term. Many asset wners feel a respnsibility t take part in sustainability matters by being mre inquisitive abut the ESG prfile and impact f their investments, r even by being mre selective in their investments. As a result, their asset managers fllw bth asset wners gals, values and ESG bjectives t execute their investment strategy. T d s, data made available by investee cmpanies is paramunt. In listening t asset wner clients and prviding them with investment slutins t achieve their financial and impact (if they have any) bjectives, the asset management industry cntributes t a mre sustainable ecnmy by: Prviding asset wners with the cmpetence t integrate ESG in the investment prcess Reprting t clients, including n ESG related risks and pprtunities Engaging with cmpanies in the prtflis f their clients t understand their management f ESG challenges Balance f E, S and G pillars A future EU strategy n sustainable finance agenda shuld fcus n a balance f the three E, S and G pillars. We wuld strngly emphasize the equal imprtance f scial challenges such as labur cnditins, human rights, the develpment f successful gvernance framewrks, as well as envirnmental issues like water risk, arable land, natural habitat t climate risk in pursuing a Page 2 f 8

3 EU Strategy n Sustainable Finance Views frm a Eurpean asset management perspective cmprehensive, cmplementary and effective apprach t sustainable finance. We believe that the G is the primary driver t achieve E and S bjectives. Active wnership r engagement has many advantages in driving crprate respnsibility n all these issues frward. 1. Prmting institutinal demand and fiduciary duty 1 Asset managers are legally required t act in the best interests f their clients. In the sustainability cntext, EFAMA believes that asset managers have a duty t integrate ESG cnsideratins int the investment prcess, when these cnsideratins are expected t have a financial impact n the perfrmance either shrt r lnger term. Over the past decade, the view has increasingly spread that many respnsible investment cnsideratins are material in terms f pricing and the risk prfile f the investment. EFAMA believes the cncept f fiduciary duty in Eurpe is aligned with respnsible investment. While we welcme the mve in the revisin f the Sharehlder Rights Directive and IORP II t encurage bth demand f ESG and disclsure f ESG criteria in the investment decisin-making in line with clients gals, we believe it wuld be inapprpriate t seek t cdify fiduciary duty, an Angl-Saxn case law cncept, int public law EU Directives. As well as being a risk management tl fr asset managers, ESG specific analysis will hinge n client demand. Building n SRD II and IORP II, asset wners need t be clear in identifying their ESG wishes and strategies and setting their expectatins as part f mandates r chsing ESG prducts. Ensuring that the adequate framewrk is in place fr gd quality disclsure f material ESG infrmatin by asset managers t their clients, in line with their fiduciary duty, will als be imprtant, and in this regard we believe the prvisins f SRD II are sufficient. EFAMA Recmmendatins EFAMA believes the cncept f fiduciary duty in Eurpe is aligned with respnsible investment and we d nt believe that any legislatin in this regard is the way frward. The ntin f fiduciary duty des nt exclude sustainability cnsideratins. Asset managers have a fiduciary duty t integrate ESG cnsideratins int the investment prcess, when these cnsideratins are financially relevant, in ther wrds: material. As intermediaries in the investment chain, asset managers apprach t ESG and related prducts rely n clients wn gals, values and ESG bjectives. Asset wners need t be clear in identifying their ESG ambitins and strategies and setting their expectatins as part f mandates r chsing ESG prducts. 1 Fr further infrmatin n ur views n fiduciary duty, please refer t the EFAMA Respnsible Investment Reprt (2016), p12 Page 3 f 8

4 EU Strategy n Sustainable Finance Views frm a Eurpean asset management perspective 2. Time hrizns: the lng-term / shrt-term debate Reducing the pressures f shrt-term perfrmance bjectives and wrking instead t invest in lngterm grwth remains an issue f paramunt imprtance fr asset managers and their clients, mst f whm are saving fr retirement and ther lng-term gals, and the glbal ecnmy. Hwever the picture is cmplex: each asset wner has their wn investment bjective and time hrizn and asset managers wh manage institutinal mandates r investment funds apply different investment strategies linked t different time hrizns in rder t meet their clients needs and expectatins. Barriers t lng-termism an asset manager s perspective Sectral regulatin fr asset managers is ften fcused n the shrt-term: MiFID II is, t a certain extent, fcused n shrt-term decisin-making. The annual, quarterly and ad hc reprting requirements f asset managers t clients in MiFID II are ne such example. Even thugh this is a barrier t lng-termism, we recgnise that such reprting is imprtant fr many clients. It is part f a set f transparency rules which is much valued bth by the asset management industry and its clients. The daily pricing fr sme defined cntributin pensin prducts is a barrier t mving twards a mre sustainable financial system, which requires investment in illiquid assets. In situatins where the participant in the pensin prduct is nt allwed t liquidate their pensin assets, befre a certain date, daily pricing is prbably unnecessary. Nature f investment management agreements: there is a culture in the institutinal market fr strategic reviews f investment management agreements t take place 3-5 years, with quarterly and annual evaluatins and reprting, meaning asset managers ften have t prve themselves n shrt-term results. Lack f adequate pensin returns fr individuals: the lng-term investment plicy f pensin savings shuld be prmted t help savers benefit frm illiquidity risk premium. EFAMA believes that the creatin f a Pan-Eurpean persnal pensin ( PEPP ) with specific investment rules and a retirement bjective can favur adequate pensin utcmes fr EU citizens, while channelling capital t lng-term investments in business and infrastructure in Eurpe. EFAMA believes that pre-enrlment disclsure f the PEPP shuld include, if applicable, reference t any specific ESG bjectives targeted by the PEPP investment ptins. Need fr lng-term utlk by cmpanies: A cmpany s management f all f its risks, including ESG, is frm an investr and asset management perspective, an indicatin f quality f management and lng-term value creatin. In the executin f their clients investment strategies, asset managers will establish whether cmpanies engage in practices which may undermine their lng-term business success thereby impacting the value f client s assets n the lng-term. In terms f market asks: Cmpanies need t be transparent abut their grwth plans t allw sharehlders evaluate prgress f their lng-term grwth strategy such as fr example infrmatin n hw a cmpany is navigating the cmpetitive landscape, hw it is innvating, hw it is adapting t technlgical disruptin r geplitical events, where it is investing and hw it is develping its talent. Annual sharehlder letters Page 4 f 8

5 EU Strategy n Sustainable Finance Views frm a Eurpean asset management perspective and ther cmmunicatins t sharehlders are t ften retrspective. Sharehlders wuld welcme dialgue n these strategic issues. As part f this effrt, cmpanies shuld wrk t develp financial metrics, suitable fr each cmpany and industry, supprting a framewrk fr lng-term grwth. Cmpnents f lng-term cmpensatin shuld be linked t these metrics and we expect the implementatin f SRD II t help in this regard. The need fr quarterly reprting is cntrary t the lng-term apprach needed. While we believe cmpanies shuld still reprt quarterly results lng-termism shuld nt be a substitute fr transparency CEOs need t shw prgress against strategic plans lnger-term. In terms f fcus fr the High-Level Expert Grup, there wuld be an pprtunity fr the EU t encurage uptake f recmmendatins put frward the FSB s Task Frce n Climate-related Financial Disclsures. Such wrk culd be expanded beynd climate change t cver all areas f E, S and G issues. Hwever, the FSB s supplemental guidance is nt specific when it cmes t metrics beynd carbn ftprint (Scpe 1-3). It is ur view that all sectrs need (sectr-specific) cmparable metrics. T enable investrs make effective investment decisins based n ESG data, the infrmatin needs t be material, frward-lking and reprted in a standardised frmat. Market benchmarks and sustainability There wuld be an pprtunity fr the HLEG t explre why sustainability utcme-riented benchmarks have nt had mre take-up. We wuld emphasize the imprtance f a market-based apprach t this questin. In terms f whether current benchmarks used by asset managers need t be phased ut in favur f mre sustainable benchmarks, the reality is that many benchmark prviders als prduce sustainability benchmarks, such as the FTSE4Gd. And anyne wh wants a benchmark that differs frm existing nes can pay fr a benchmark prvider t d s. Reliable benchmarks are thse which accurately reflect the market. Benchmarks cannt change investment strategies, rather they are used t measure the quality f executin f such strategies. EFAMA recmmendatins Frm an asset management perspective, there are a number f bstacles t lng-termism such as sectral regulatin, the nature f investment management agreements and lack f adequate pensin returns. We are encuraged by the recmmendatins f the FSB s Task Frce n Climate-related Financial Disclsures which will enhance lng-term utlk by cmpanies and there is certainly an pprtunity fr the EU t encurage uptake f these recmmendatins, which will build n the Nn- Financial Reprting Directive. In terms f market benchmarks and sustainability, there is an pprtunity fr the HLEG t explre why sustainability utcme-riented benchmarks have nt had mre take-up, hwever we wuld strngly emphasize the imprtance f a market-based apprach t this questin. Page 5 f 8

6 EU Strategy n Sustainable Finance Views frm a Eurpean asset management perspective 3. Transparency In EFAMA s view, transparency is ne f the tls with great ptential t reinfrce sustainable finance. Standardisatin at EU level shuld ccur n crprate reprting, and n institutinal investr reprting. Hwever, standardisatin f prducts in general, but especially s in respnsible investing, culd, in ur view, stifle innvatin and market develpment. Standardisatin f reprting By cmpanies We welcme the Nn-Financial Reprting Directive which will encurage cmpanies t disclse relevant, material ESG infrmatin as well as the Eurpean Cmmissin s recently published Guidelines n the disclsure f envirnmental r scial infrmatin, which will help cmpanies disclse in a cnsistent and mre cmparable manner. Assessing the take-up and the rlling ut f these initiatives ver the next few years will be essential. Frm an asset manager s perspective, the drive twards standardisatin f disclsure framewrks is key fr ensuring access t reliable and accurate reprting n ESG issues by cmpanies. Frm an asset manager s peratinal pint f view, this will facilitate the investment decisin-making prcess but als enable asset managers quantify the impact f their investments n their prtflis. Cntinued develpment and harmnisatin f disclsure practice glbally is therefre f utmst imprtance. T fster further capital allcatin t sustainability, the EU culd supprt the streamlining / harmnisatin f data such as: CO2 emissins by investee cmpanies; and in terms f business risk the embedded CO2 emissins in prducts sld by cmpanies in certain industry sectrs (e.g. cal, liquid fuels, gas etc.) Whether r nt ESG is integrated int the remuneratin rules f investee cmpanies; Unfreseen emplyee absence as percentage f wrkable days; Turnver f emplyees; Independence f the bard (number f independent bard members, i.e. nt being part r related t management, n cnflict f interest); Diversity f the Executive Bard and f the Supervisry Bard f the cmpany; Diversity f the wrkfrce; Whether r nt the cmpany has signed the Glbal Cmpact; Supply chain management; Reprt n relatinships with key stakehlders such as emplyees. Page 6 f 8

7 EU Strategy n Sustainable Finance Views frm a Eurpean asset management perspective By asset wners and asset managers In principle, we are supprtive f carbn reprting fr institutinal investrs. Hwever, the key frm an peratinal perspective remains bth prprtinality and a harmnised methdlgy fr ding s. As explained abve, a prerequisite fr ding s will be reliable data frm cmpanies. ESG Labels and ratings 2 In any discussin f the rle f the EU in develping and prmting EU labels and SRI prducts, EFAMA believes the fllwing set f principles are fundamental in the elabratin f ESG ratings and labels fr investment funds and asset managers: Initiative fr the rating/label: Initiative shuld be with the fund/asset manager, nt the labelling r rating rganisatin, as this ensures that nly funds are ESG-labelled where relevant. Cmparability: In the interest f cmparability fr cnsumers, achieving ne standardised r harmnised Eurpean way f labelling r rating funds culd be a mid-term gal. Cmmn definitins and guidelines at EU level wuld be a first step in the right directin. Prcess-based apprach: EFAMA believes respnsible investment shuld be defined n a prcess basis, nt n the basis f (utcmes f) a certain set f mral r ethical values. All asset classes and all dimensins f ESG investing shuld be cvered: T enable cmparability fr investrs, an ESG rating r label shuld generally be suitable fr every fund. ESG investment funds and respnsible investment assets under management need t be distinguished: Asset managers may integrate ESG factrs in their investment prcess withut applying a specific ESG strategy at the fund level. A sustainability rating shuld distinguish between respnsible investment assets under management and ESG investment funds. Objective evaluatin: A label dentes an bjective evaluatin by a third party (i.e. the label prvider) f the ESG prcess that is fllwed by the fund and/r its manager. Rating prviders shuld use different varied surces t prperly assess the fund s assets, r else be transparent in relatin t the set f ethics/mrals the rating is based n. Take ESG investment strategies int accunt: Given the linkages between envirnmental, scial and gvernance challenges, a sustainability rating r label shuld take all ESG related questins int accunt. Exclude cnventinal scring aspects: ESG ratings and labels will nly be able t prvide investrs with meaningful cmparability regarding respnsible investing if the rating r label fcuses slely n these aspects. Cnventinal cnsideratins such as csts r perfrmance shuld be cvered separately in cnventinal ratings and labels. Transparency: Prviders shuld disclse their methdlgy. Where a hldings-based apprach is used, it shuld be pssible t lk thrugh the prviders assessment f funds hldings t 2 EFAMA has written an pinin n ESG ratings and labels. This sectin is a summary f the general principles which we believe shuld be taken int accunt by ratings/labels prviders in the elabratin f ESG ratings and labels fr investment funds and asset managers Page 7 f 8

8 EU Strategy n Sustainable Finance Views frm a Eurpean asset management perspective understand the rating. In ther wrds, in a hldings-based apprach the set f ethics/mrals which lead t the scring f individual hldings shuld be given. EFAMA Recmmendatins Further standardisatin f disclsure framewrks is essential t ensure asset managers access t reliable and accurate reprting n ESG issues by cmpanies. Frm an asset manager s peratinal pint f view, this will facilitate the investment decisin-making prcess but als enable asset managers quantify the impact f their investments n their prtflis. In principle, we are supprtive f carbn reprting fr institutinal investrs. Hwever, any plicy initiative in this regard needs t fcus n prprtinality and a harmnised methdlgy. In any discussin n a rle fr the EU in develping a sustainable finance label fr sustainable finance prducts, EFAMA wuld encurage plicymakers t refer t ur general principles n ESG ratings and labels which lays ut ur visin n the matter. Brussels, 28 September 2017 [ ] *** Page 8 f 8