Investors and companies alike are being forced to reckon with the implications of environmental, social and governance challenges. In this weekly roundup, we explore growing concern about greenwash, new funds launched and shifting interest from the fossil fuel sector.
Political goals continue to affect regional development of sustainable finance
Politics continues to be a challenge for climate action, as pressure from US attorney generals, threatening anti-trust action on the insurance sector, has led to many retreats from the global Net Zero Insurance Alliance. While members that have left the alliance say that they still plan to take individual action, there is no doubt that the loss of a collaborative network could slow progress across the industry.
There are plenty of regional differences adding to the challenge. While the UK may have left the EU, decisions at the European level have a wide impact, especially in terms of international finance, and the bloc’s plans for transition are gathering pace. As part of its Financial Stability Review, the European Central Bank (ECB) published its latest views on the sovereign risks arising from climate change, referring to the different impacts that an orderly or a disorderly transition can have. It is explicit about the positive role of states in reducing those risks, and the importance of the issuance of green and sustainable bonds to finance the transition.
The European Parliament has voted on extending due diligence requirements for asset managers. Alongside the introduction of the Corporate Sustainability Reporting Directive (CSRD) this is going to transform the sustainable finance market in Europe. While it still has to get through the trilogue and receive final approval, there is growing understanding that voluntary actions are not likely to drive the level of transparency needed for the sector to grow and achieving its goals.
Greenwash continues to undercut trust in European sustainable finance
Greenwashing is a significant concern in the financial sector and one that the EU continues to address. The European Supervisory Authorities (EBA, EIOPA and ESMA, collectively referred as the ESAs) have said that identifying what constitutes greenwashing is going to be critical to the effective deployment of sustainable finance – especially given that it is believed that ‘many’ financial services providers have provided misleading information about their products and services.
They have published a set of Progress Reports on Greenwashing in the financial sector, with the final reports expected in May 2024. There is the EBA report on Greenwashing Monitoring and Supervision, EIOPA advice to the European Commission on Greenwashing, and the ESMA report on Greenwashing. In these reports, the ESAs put forward a common high-level understanding of greenwashing applicable to market participants across their respective remits – banking, insurance and pensions and financial markets.
This backs up recent research from Clarity AI which suggests that less than 4% of 1,800 ‘green’ or ‘sustainable’ funds would quality across Europe, the US and the UK. “When looking at funds with all three investment fund regimes – the US’, UK’s, and EU’s – we found that over 95% of funds with the word ‘sustainable’, or similar term, would require renaming or restructuring in order to be sold across all three markets,” said Clarity AI’s head of product research and innovation Patricia Pina, highlighting the confusion prevalent in the market.
Despite concerns about greenwash and the potential impact on trust and public appetite, interest in the sector continues to grow, as executives and investors are beginning to adapt to a changing market. Last week, a report showed that business leaders are feeling increasing pressure to prioritise best practice in ESG implementation and news funds and indices continue to be launched.
Despite political upheaval ESG remains an investment focus
On of the investment side, HSBC was widely reported to have launched an AI-backed ESG index, the HSBC ESG Risk Improvers Index. It was developed by Arabesque AI and is based on ESG Book data. The digital indicator was created to track the dynamics of the price range of more than 100 liquid shares of global companies.
ESG Book, a leading provider of ESG data and analytics for public markets, calculates the ESG score of each constituent of the Index by deploying AI, in the form of natural language processing, to mine relevant public sources daily, such as ESG-related news and NGO data. The ESG score helps investors determine which companies may be better positioned to outperform the market over the long term.
According to the developers, these firms will benefit in the form of financial growth from the improvement of their ESG risks. Yasin Rosowsky, co-founder and VP of engineering at Arabesque AI, said that based on back-tested data is a positive correlation between companies transitioning to more sustainable business practices and their returns.
There is an increasing body of evidence of such impact across portfolios too. Cazenove Capital, a UK wealth management business and part of Schroders, has published its latest Sustainability and Impact Investment Reports, showing how the firm’s Sustainable Growth Fund for private clients and Responsible Multi-Asset Fund for charities are achieving financial returns and having a positive impact.
Cazenove reported that its Charity Responsible Multi Asset Fund returned 16.8% over the last three years, as compared to the ARC Steady Growth peer group index 3.5% – while the firm’s Sustainable Growth Fund also delivered a return of 20.7% over the last three years, compared with the peer group return of 3.5%.
New Article 9 funds continue to be issued
In similar vein, Rize ETF, Europe’s first specialist thematic ETF issuer, listed its new Rize Circular Economy Enablers UCITS ETF (CYCL) on the London Stock Exchange and the Frankfurt Stock Exchange. The ETF will also be listed on the SIX Swiss Exchange in the next several weeks. The company said CYCL is Europe’s first Article 9 sustainable thematic ETF specifically targeting publicly listed companies that have been identified as enablers of the transition to a more circular economy.
According to Rize, this classification includes companies such as Origin Materials (NASDAQ: ORGN), Verbio Vereinigte (XETRA: VBK), Aurubis (XETRA: NDA), in contrast to Circular Economy Practitioners such as Lego, IKEA and Nike (NYSE: NIKE, which actively engage in implementing circular economy principles into their business models, or Linear Economy ‘Best Practice’ Facilitators which focus on optimising traditional linear economic models, such as Waste Connections (TO: WTN), Veolia (XETRA: VVD), Republic Services (NYSE: RSG) etc.
ING launched its own Article 9 Fund, the SDG Impact Fund. Achieving the SDGs could open up an estimated $12 trillion in market opportunities, according to the Better Business Better World report by the Business & Sustainable Development Commission. Spain’s Azora, a Madrid-based investment management platform, also filed to launch an Article 9 pan-European private equity fund, which will have a decarbonisation theme around lower and mid-market businesses. Meanwhile in the US, Brown Advisory launched its US Sustainable Values UCITs Fund.
In a move that is almost in opposition to the focus on ESG and climate, TotalEnergies (NYSE:TTE) has sold off its entire climate corporate venture portfolio. Aster Technologies won the fight to acquire the entire climate tech portfolio of TotalEnergies CVC arm TotalEnergies Ventures. The portfolio is made up of minority stakes in about 20 companies, mainly located in Europe and the US. The company declined to answer questions on the move.