New regulations like the European Union’s SFDR (Sustainable Finance Disclosure Regulation) and California’s new climate disclosure bill, are putting pressure on asset managers, asset owners and other financial market players to increase transparency around their investments’ sustainability risks and impacts. These regulations signal a major shift in the market. Why do they target investors specifically? Are they useful or are they just another administrative burden? In this blog, I will explore these questions based on key insights I heard at RI Netherlands’ recent webinar series.
- Meeting high expectations
Investors are currently faced with a dilemma. On the one hand, they have to earn the trust of the public at large. On the other hand, there are high expectations about investors’ role in meeting sustainability targets. For government bodies, investors have considerable influence over the companies they invest in. Society is also exerting more pressure on investors, given their influence over big business. There is a common notion that investors can influence companies to act on climate change. This can be seen clearly in laws like SFDR and California’s new climate disclosures bill. In a sense, these regulations enhance their power as capital providers. They recognise that investors have a crucial role to play in financial aspects and policy surrounding sustainability. The question is, are investors ready to exert this power? I would argue that many of them have been ready for some time.
- Investors have the commitment
There is a strong commitment by lots of investors to contribute to the Paris Climate Agreement and actively engage in responsible investing. RI’s recent event featured speakers from Stichting Pensioenfonds ABP (which is the pension fund for government and education employees in the Netherlands), PME (a pension fund for the metal industry), Robeco (Orix’s asset management wing) and KPMG, among others. Many of these participants stated that the idea of sustainable investing is, in fact, not new. In several cases, their policies and strategies surrounding sustainability were not triggered by law and regulation. The commitment was voluntary for instance to help reduce their investment risks or meet client demand.
Back in 2019, we also saw BlackRock and State Street Global Advisors, two of the world’s largest asset managers, publish open letters stating that the time had come for companies to disclose details on the financial risks surrounding global warming. In a sense, the intention has been there for some time. Many have put intentions into practice by adapting their models and tools as well.
- Portfolio assessments are becoming more sustainability-aware
Many investors have already adapted their tools and models to account for sustainability when making portfolio decisions. So far, there are two aspects to this:
- Understanding risks: how much of a risk does climate change pose for this particular investment?
- Understanding impact: what is the impact of my investee companies on climate change?
In the end, it comes down to portfolio risk assessments. For these evaluations, investors typically rely on intermediaries and specialists. Asset managers like Robeco, for instance, are already advising investors to choose portfolios that are balanced from a sustainability point of view. Still, making the right decisions can often be challenging. The models might be there, but the right data is lacking.
- Collecting meaningful sustainability data is still a major challenge
This came up several times at the RI Netherlands event. In most cases, investors and asset managers have to rely on industry averages and estimates to make portfolio decisions because no actual data can be obtained. A common practice is using publicly available averages on carbon emissions from a particular industry, instead of using data collected from a particular company’s operations. Regulations that mandate data collection will help to address this problem. But the obligation to report is not enough. You need standards to make data meaningful and actionable.
- Standardisation is needed to take sustainable investing to the next level
Most investors would agree that the lack of standards and harmonisation in reporting hinders their ability to make responsible decisions. Without standards, there is no way to measure individual progress on a company-level, or benchmark the performance of different companies. Meaningful data comes when you have standards. When the data at hand has common and understandable definitions, you can start drawing conclusions, calculating trends, and making comparisons. In other words, you get quality insights and decision useful information.
In sum: meaningful and standardised data will help investors perform investment analysis using high-quality data and enhance their investment decision and their stewardship role. At Visma Connect, we launched Visma Sustynex to help investors tackle this particular challenge. We understand that mandatory reporting is not enough. You need common definitions and actionable insights to put sustainable investing into practice. It’s great to see that the market is moving in our direction. We will certainly continue to follow these developments closely.