Luxembourg, 23 rd March 2016 Public consultation on long-term and sustainable investment Introduction The Association of the Luxembourg Fund Industry (ALFI) is the representative body of the Luxembourg investment fund community. Created in 1988, the Association today represents over 1300 Luxembourg domiciled investment funds, asset management companies and a wide range of service providers such as custodian banks, fund administrators, transfer agents, distributors, legal firms, consultants, tax experts, auditors and accountants, specialist IT providers and communicatio companies. The Luxembourg Fund Industry is the largest fund domicile in Europe and a worldwide leader in cross-border distribution of funds. Luxembourg-domiciled investment structures are distributed on a global basis in more than 70 countries with a particular focus on Europe, Asia, Lati America and the Middle East. We thank the European Commission for the opportunity to participate in this consultation on retail financial services. We support the submission of the European Fund and Asset Management Association (EFAMA). Response to the consultation 1. Rationale for ESG inclusion into investment decisions 1.a. Do ESG factors pay a role in the investment decisions of investors? If not, why? If yes, please specify which considerations are reflecting in your investment policy and mandates? In what form is this commitment expressed? ALFI, being the representative body of the Luxembourg investment funds industry, will answer from an investment funds perspective. We support the submission of the European Fund and Asset Management Association (EFAMA). Recent studies show that asset managers are increasingly focusing on Responsible Investing products: The European Responsible Investing Fund Survey 2015 performed by ALFI and KPMG in December 2014 showed a 25% compounded asset growth rate of the assets under management in Responsible Investing products since December 2012. 35% of these products are domiciled in Luxembourg. While impressive, these figures may even be underestimated since the study focused only on funds that wish to be formally identified as ESG products. 1
A large number of funds integrating ESG aspects in their investment policies may therefore not be covered by the study. The growth in number of signatories of the UNPRI is another indicator of the rising Responsible Investing demand: launched in 2006, there are now almost 1500 signatories. The UN PRI encourage asset owners, investment managers and professional service partners to incorporate sustainability issues into their investment decision making and ownership practices. The global proportion of Responsible Investing relative to total managed assets simultaneously rose from 49% to 58,8 % in Europe and from 21,5% to 30,2% globally between 2012 and 2014 as the Global Sustainable Investment Alliance (GSIA) review 2014 shows. The same study shows that Institutional investor demand is driving this market growth. These figures confirm the growing interest in Responsible Investing products on a worldwide scale. 1.b. What is the main rationale for institutional investors and asset managers to take ESG risks and opportunities into account in their investment decisions? Please indicate all the relevant issues (multiple choice) a) risk management: b) alignment of investment policies with the long-term interests of beneficiaries of the institutional investor, c) pressure from clients on whose behalf the institutional investor invests funds, d) seeking a positive social or environmental impact of investments, e) ethical considerations, f) legal or regulatory constraints, please specify, g) other, please specify. a) risk management: i) managing asset value risk in the short-term, including preservation of investment value, better investment performance, ii) managing asset value risk in the medium-to long-term, mitigation of exposure to longterm and systemic risks, iii) management of liability risks, Please provide an explanation: 2. Information on ESG risks and opportunities 2.a. Which ESG risks do you perceive as material to investors? 2
We perceive image problems and porfolio volatility due to ESG issues (e.g. VW) as material to investors. 2.b. What are the main sources of reliable and relevant information for investors on material mediumto long-term risks and opportunities, particularly on ESG issues? Information available will usually depend on the nature of the investment process: - Direct investment into target companies: the investor will usually seek ESG information in the company annual report, CSR reports, research from specialised ESG data providers and other public information available (NGO s, press,...) - Investment through a mandate: ESG criteria to be considered as well as investment selection process might be described in the investment management mandate (upon investor request). - Investment through an ESG investment fund: when an investment fund is marketed as an ESG product, the prospectus, annual reports, KIID (when applicable), will usually provide additional information on the ESG policy, selection criteria, investment process and results. External labelling (LuxFLAG) may also provide further information. Additional information on ESG is, and should remain, disclosable on a voluntary basis by those players who actively integrate ESG criteria as a key element of their investment policy. In order to preserve the qualitative and informative features of these disclosures, we are strongly convinced that they shall remain optional/voluntary. Should they become mandatory across all investment products, we believe that these disclosures would become a tick the box compliance exercise, to the detriment of the transparency and quality of information provided to investors. Additionally, mandatory disclosure could result in ESG information service providers increasing costs and pricing smaller players out of the market. 2.c. Is it difficult for investors to access such information? If so, please specify: Refer to our answer under 2.b 2.d. Is access to such data expensive? If so, please specify: It is expensive for managers to track, analyse, compile and report on such information, but it is typically not expensive for investors to access it. The qualification of research as inducement under MiFID II could limit access to ESG research by investment managers, which in turn would discourage the development of ESG integration. Explicit exclusion of ESG related research from the scope of inducements under MiFID II could, to the contrary, foster ESG research. 3
2e. What factors may prevent or discourage companies from disclosing such data? Collection and disclosure of data is a cost for companies and therefore will only be incurred if companies have an incentive to do it e.g. investors demand, legal or regulatory requirement, compliance with market standards, compliance with listing venues rules etc. 2.f. What is the main rationale for companies to publish such information? Please indicate all the relevant issues. (multiple choice) a) relevance of ESG issues to company performance b) attracting financing for specific projects, for example green bonds c) legal or regulatory constraints d) demand from investors e) pressure from stakeholders f) other f) other - please specify: 2.g. Is there sufficient accountability for the disclosure by companies of such information? In their capacity of investors, funds would welcome more harmonisation in the disclosure/reporting made by companies with respect to compliance with ESG standards. This would enable asset managers to more easily screen issuers pursuant to non-financial criteria. 2.h. What are the best practices as regards internal corporate governance processes to ensure properreliability of the disclosed information? Setting up an independent committee, sustainability reporting using the GRI s Sustainability Reporting Standards (www.globalreporting.org) and reliance on independent third parties such as label/rating agencies, auditors (non-financial audit), regulators etc. are the best practices to ensure proper reliability of the disclosed information. 2.i. What is the role of specific ESG investment instruments, like green bonds? 4
3. Integrating ESG information into risk assessment models of institutional investors and asset managers 3.a. What should an appropriate long-term risk assessment methodology look like? Please indicate some examples of good practice. 3.b. Are there specific barriers, other than those of a regulatory nature (see question 9) for investors to integrate medium-to long-term risk indicators, including ESG matters in their risk assessment? If so, please indicate what you consider to be the main barriers. 4. Integration of ESG aspects in financial incentives4.a. When selecting and remunerating asset managers, how do institutional investors take into account asset managers' integration of ESG issues into investment strategies? What are the best practices in this area? In impact-focused investment funds some institutional investors have developed metrics and remuneration tools which link part of the remuneration to non-financial performance. See for instance the issue brief paper produced by the GIIN (Global Impact Investing Network) on impact based on entire structures aligning fund manager compensation with social and environmental performance: https://thegiin.org/assets/documents/pub/impact-based-incentive-structures-aligning-fundmanager-comp.pdf. In order to link remuneration to non-financial criteria in an -as objective as possible manner- impact performance tools shall be selected (see for instance the Outcomes Matrix developed by Big Society Capital: http://www.bigsocietycapital.com/impact-matrix). The most tangible evidence of this new approach to fund manager remuneration linked to impact performance is implemented in the social impact space by the Social Impact Accelerator Fund-of- Funds run by European Investment Fund who applies the Gamma model to link the fund manager s profit share to the portfolio s impact results. One could argue that if ESG considerations are truly integrated into investment decisions, they will be reflected in improved performance and that is usually the way in which asset managers are selected and their fund managers remunerated. 4.b. Is ESG performance and active asset ownership taken into account in the remuneration of the executives and/or board members of institutional investors? What are the best practices in this area? 5
5. Capacity of institutional investors 5.a. Do you think that the lack of scale or the lack of skills and resources of some institutional investors may affect their ability to integrate ESG factors in investment decision-making and engage on such issues? If so, how? Please provide evidence if possible. 5.b. Please indicate measures/practices that have contributed to enhance institutional investors' capacity and ability to integrate ESG factors in investment decision-making and engage on such issues. Independent analysis provided by third parties, which are independent from the asset manager, such as labelling agencies, rating agencies, auditors (non-financial reports and independent assurance statements), regulators (eg. EuSEF list) as well as UN PRI transparency reporting. In addition, the development of Fintech and data crunching tools enables to increasingly and easily screen investment opportunities with multiple criteria, including non-financial ones. 6. Internal governance and accountability of the institutional investor 6.a. To what extent can good internal governance of institutional investors, such as mechanisms aiming to align interests between beneficiaries, board and key executives, influence their ability and willingness to integrate ESG factors in investment decisionmaking and engage on these issues? Please provide evidence or good practices if possible. 6.b. Do beneficiaries of pension funds and other institutional investors with long-term liabilities obtain sufficient and clear information about how the fund or investor is managing ESG risks? Can they give their opinion/be consulted on these aspects? Please provide examples of good practice. When assets are invested through investment funds, they receive information through the fund prospectus, KIID and annual report (refer to our answer under question 2.b). 6.c. Are beneficiaries interested in matters referred to above? Please provide evidence if possible. The KPMG-ALFI study on European Responsible Investing Fund Survey demonstrate increasing interest from investors: http://www.alfi.lu/sites/alfi.lu/files/european-responsible-investing-fund-survey-2015_1.pdf 6
7. The role of other service providers 7.a. Is there sufficient long-term oriented, reliable and relevant external investment research? Are there barriers to good quality external investment research on ESG risks and opportunities? If so, please explain. What role, if any, do financial incentives or conflicts of interests of some service providers play? 7.b. To what extent do investment banks, investments analysts and brokers provide information on medium-to long-term company performance, including corporate governance and corporate sustainability factors, when they make buy, sell and hold recommendations to investors? Please see our comments on MifID II under question 2d 7.c. To what extent do investment consultants consider the asset managers' approach to ESG issues and active asset ownership when advising institutional investors about the selection of asset managers? 7.d. To what extent do proxy advisors consider medium-to long term performance of companies, including ESG performance, in their voting recommendations? 7.e. To what extent do credit rating agencies take medium-to long term performance of companies, including ESG performance, into account in their ratings? 7.f. What are the best practices as regards independent external assurance (for example auditor review) for the disclosure by companies of material medium- to long-term risks and opportunities, particularly ESG issues? 8. The role of non-professional investors 8.a. Do you know of initiatives that led to more sustainable and responsible investment from non-professional investors? Please provide details about them. There are a number of initiatives raising global awareness on sustainable and responsible investment either at international or at national level. Examples thereof are GIIN, Eurosif, EVPA at international level or EIIL, Tiime, LuxFLAG etc. 7
9. Legal or regulatory constraints 9.a. Are there legal or regulatory constraints likely to significantly and unduly prevent or discourage investors from taking a long-term view in their investment strategies and decisions and from investing in a sustainable way? If so, please provide details. Asset owners may be constrained by liquidity requirements (UCITS rules), solvency requirements (Insurance companies) and eligibilty/diversification rules (ELTIF). 9.b. Do you believe that there are any barriers to the understanding by institutional investors and asset managers of their fiduciary duties that would not enable them to appropriately take ESG factors into account in their investment decisions? Please explain. Where institutional investors understand that ESG risk integration is simply a more holistic and thorough way of assessing fundamental risk, they see that it is not a contradiction of fiduciary duty. Indeed, the Principles for Responsible Investment specific that the Principles apply only where consistent with fiduciary duty. 10. Others 10.a. Are you aware of any other incentives or obstacle(s) with a significant impact? If so, which ones? 10.b. Would you consider further increase in sustainable investments if market or regulatory conditions for sustainable investment would be more favourable? If so, please provide estimations, if possible. 8