European impulse for sustainable investing

Investing in sustainable businesses is set to become easier under new European regulations. That is good news for investors and society at large.

Many investors are positively about taking sustainability on board in their investment decisions. But selecting the right investments can be a challenge. Which investment funds, for instance, are really sustainable and does sustainable investing affect the performance of an investment portfolio? To help investors answer these questions, the European Commission is working on new legislation that will make sustainable investing easier for investors.

Climate objectives

In its plans, the European Commission emphasises the environmental performance of companies and investment funds. In this way it would like to enable investor to allocate more money to achieve the targets set in the Paris climate agreement. Just over two years ago, 195 countries signed the climate agreement outlining measures to curb global warming – an ambitious plan that calls for substantial investments. In Europe too. For instance, in innovative firms developing technologies to accelerate the energy transition from fossils to renewables.

By making sustainable investing more accessible and attractive, it will be more interesting for investors to invest in companies that contribute towards the achievement of the Paris climate objectives.

Insight into sustainability of companies and funds

To this end, sustainable investing must be made more attractive. Some countries recently unveiled initiatives in this field, such as a ‘label’ for sustainable investment funds in France, Luxembourg, Belgium and Germany. Progress elsewhere, however, is much slower. Key to the new European measures is the introduction of harmonised sustainable investing regulations for all countries in the eurozone. An international taxonomy giving insight into the sustainability of investments is currently on the drawing table. Once this system has been implemented, investors will be able to check a wide array of companies and investment funds on environmental aspects such as CO2 reduction and contribution to the energy transition. A European benchmark could make it easier to make relevant comparisons. Which is very handy, because cross-border investments are common in Europe. Many Dutch investors, for instance, hold French, British and German fund houses in their portfolio.

Which investment funds, for instance, are really sustainable and does sustainable investing affect the performance of an investment portfolio?

Risk and return

Moving forward, all financial parties will be required to raise sustainability with their clients – the Mifid II regulation will most likely be amended accordingly. Investment clients will be asked to specify their preferences regarding the sustainability of their investment portfolio. The risk and return expectations must also be documented. Research shows that portfolios based on sustainable criteria deliver the same long-term returns as non-sustainable portfolios. However, if an investor opts for a fund with many exclusions, which rigorously adheres to sustainability criteria and entirely excludes certain sectors for example, the risk and return may be affected. So it is important to communicate well and have clear agreements about this, just as with traditional investments.

Investment clients will be asked to specify their preferences regarding the sustainability of their investment portfolio.

Sustainable offerings on the increase

The European Commission is now working out its plans. Besides providing greater clarity and transparency on the existing offerings of international sustainable investments, there could be a growing choice of good-quality sustainable investments and growth for the sustainable investment industry in general. That’s good news for the climate and investors alike.

Vincent Triesschijn, Director Sustainable Investment ABN AMRO Bank

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