Fund managers can be a positive force for sustainability

Improving bottom line by ensuring sustainability, creating value and creating a positive impact on the community is the new, and I would even say the only, way of doing business. Asset managers and institutional investors are already playing a vital role when it comes to making investments which make a real impact to people’s lives.

If we look to Africa, private equity has a major role to play in plugging the gap in national budgets to ensure that the right infrastructure is built in the energy sector, amongst others. Major projects, such as the Lake Turkana Wind Project in Kenya, which is the largest wind farm project in Africa, have been part funded by private equity firms based in Europe, which already demonstrates genuine commitment to making a difference through investments.

While much good work has already been done, the European Commission is now considering whether asset managers and institutional investors can be further encouraged to ensure sustainability when taking decisions. A public consultation exercise is now underway, which runs until January 22, 2018, which invites the industry and wider stakeholders to offer their views on how ESG factors could be incorporated into decision-making.

This follows the interim report of the High-Level Expert Group on Sustainable Finance which reported in July 2017. The HLEG recommended that a “fiduciary duty” encompassing sustainability be established, and that the duties of asset managers and institutional investors should explicitly integrate material ESG factors and long-term sustainability.

This initiative can be seen in the wider context of EU work to follow up on the Paris Climate Agreement as well as the UN 2030 Agenda for Sustainable Development, adopted at the end of 2015.

The consultation exercise now poses a number of pertinent questions for asset managers and institutional investors to consider, if further improvements are to be made in the future.

Samples of the questions that are being asked through this exercise are:

• What are the relevant sustainability factors to be taken into account?
• Based on which criteria should the relevant investment entities consider sustainability factors in their investment decision making?
• Should uniform criteria to perform sustainability risk assessments be developed at EU level?

End investors are also asked for their views on potential benefits of EU action, such as enhancing the ability to attract investors with specific sustainability requirements and reputational benefits, as weighed against potential costs, such as decreased financial performance or additional compliance costs.

We see a strong trend of asset managers developing new policy options in the light of the responses to these questions, encompassing some of the following elements:

• Introducing disclosure rules to document how institutional investors and asset managers are taking into account sustainability factors
• Enhancing the consideration of material sustainability factors in the investment strategy/asset allocation;
• Improving the consideration of sustainability risks as part of the risk management processes;
• adapting governance arrangements to ensure appropriate decision-making capabilities.

Where will the current process lead us? The EC will adopt an action plan on sustainable finance in Q1 2018. An impact assessment exercise is already underway to see whether and how a clarification of the duties of institutional investors and asset managers in terms of sustainability could contribute to a more efficient allocation of capital, and to sustainable and inclusive growth. It remains to be seen whether EU action will take the form of guidelines to clarify existing duties or new legislation which revisits existing EU laws governing institutional investors and asset managers.

This EU initiative will offer the chance to fund managers to reinforce their contribution to ensuring sustainability at global level. Thanks to this natural evolution, the private equity industry will reinforce its position as a key driver of the economy even more.