In an era marked by climate-change fuelled significant weather events, financial market players are becoming more aware of environmental, social and governance (ESG) factors. Sustainable finance, once a niche concept, has evolved into a driving force shaping investment strategies and corporate practices globally.
Sustainable investment is “a way of doing long term investment that gives great returns [in terms of] both financially and for [investment managers],” explained Lloyd McAllister, head of sustainable investment at Carmignac, a French asset management company present in Luxembourg since 1999. “Sustainable investment is kind of triple bottom-line investing” in financial, natural and social capital.
“And I don’t think there is a conflict between [the three investment goals], as long as you have long enough time horizons and the right incentive structures in place,” he added. The types of funds that can be set up are also fairly broad, with examples including sustainable global equity funds, global income funds or fixed-income funds. “The principles of running a sustainable fund can be applied in most investment situations, if it’s aligned with client interests and regulations.”
ESG assessments give more insight into companies
ESG integration, a concept increasingly gaining attention in the asset management industry, involves using ESG as a supplementary information set for comprehensive financial and macro analyses.
McAllister noted that some entities now incorporate ESG assessments to gain deeper insights into how companies navigate regulation or address issues like bribery and corruption, while emphasising the need for thorough due diligence before making investment decisions.
“If you have an ESG process that is just focused on disclosures, and not underlying corporate performance--so if you give a tip to a company that has a 100-page sustainability report, without understanding whether things are getting better or worse, or [if] they’re looking at the right things--you’re going to have bad outcomes.”
Three key regulatory points
Regulators are emphasising the way market players handle climate risks issues, with a particular focus on the disclosure and integration of ESG considerations into broader risk management frameworks.
Luxembourg’s sustainable finance investments adhere to ESG regulations at the EU level, such as the Sustainable Finance Disclosure Regulation, which requires managers to assess and disclose sustainability risks in investment processes. The EU taxonomy regulation, furthermore, establishes a framework to evaluate the environmental sustainability of economic activities, which includes reporting on eligibility and alignment with six environmental objectives.
McAllister highlighted three key points regarding ESG regulation in Europe in 2024: the outcome of the ongoing SFDR consultation; France’s Socially Responsible Investment sustainability label; and the UK’s release of its sustainability disclosure regime.
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“We are not expecting material changes to SFDR for probably three or four years, for a variety of reasons around the complexity of changing it and the [European] elections [in 2024],” noted McAllister. “But I do think there should be some clarification of things like the terms that they use in it, like [how] they use phrases like ‘sustainable investment’ and ‘good governance’ and ‘do no significant harm.’”
Without these clarifications, there is the risk of ending up with several different interpretations, he said in the interview. “That means that the original purpose of the regulation, which was to just bring end clients clarity, they’re now just faced with hundreds of pages of sustainability disclosures [that] become, I think, overwhelming for the average person to just understand what’s going on.”