Delivering on sustainability goals requires a move away from traditional investment approaches

Delivering on sustainability goals requires a move away from traditional investment approaches

Piebe Teeboom, Secretary General of the European Principal Trades Association (FIA EPTA), details the findings of a new report on sustainable finance from the perspective of global asset managers. The study reveals the need for a broader concept of ‘value’ – which requires new ways to manage data and ensure trust in ESG assets.

Sustainable finance has been riding high in the news this past year. We saw unprecedented COP26 pledges by financial intermediaries and we saw sustainable bond issuance hitting the $1trn mark for the first time. Despite the ongoing global pandemic, 2021 was a record year for ESG investing, with an estimated $120bn directed to sustainable investments.
Yet, what should – at first glance – be cause for rejoicing has led to a fierce debate over the value of ESG finance and its true impact. There’s a new fundamental concern in financial circles and it grates against the ears: greenwashing.
In recent weeks, Deutsche Bank’s DWS unit delisted some 75% of its ESG assets after facing questions about rating validity. Banks that signed on to the Glasgow Financial Alliance for Net Zero following COP 26 face pushback for loopholes permitting coal investments until next year. And EU taxonomy discussions over the “green” labelling of nuclear and gas energy have led to a diplomatic tussle between member states.
These headlines prompted Robert Ophèle, chairman of the French financial supervisory authority, to issue a rare rebuke of current EU ESG rules, saying they ‘’almost invite greenwashing’’. He singled out the Sustainable Finance Disclosure Regulation’s articles 8 and 9 governing fund categorisation for their loose, catch-all wording. According to Ophèle, “SFDR doesn’t provide for any harmonisation in the European fund landscape.”

Asset Managers Want the Right Tools to Support the Green Transition
​These doubts culminated last month just as we at FIA EPTA, the association for European Market Makers, published a report on the pitfalls of traditional approaches to ESG investing and necessary reforms. This study of global asset managers, unsurprisingly, reveals a growing enthusiasm for sustainable investments and a determination on the part of financial actors to drive the green transition forward. However, with mistrust of ESG impact rising in tandem with greenwashing concerns, this momentum risks being undercut unless more principles-based and outcome-focused approaches are adopted.
The report identifies two main concerns:

  1. Greenwashing risks caused by incomplete or deficient ESG data;
  2. And, in parallel, over-reliance on traditional exclusions-based investing, which can cause asset inflation.
To address these, asset managers need new ways to generate and manage better actionable data – and insights – that help reveal the full sustainability story about potential investments. At present, they must rely on spotty data and rating criteria that vary wildly between jurisdictions.
“As investment strategies pivot away from commercial concerns to meeting broader SDG objectives, the web of complexity is increasing,” said report author Rebecca Healey. “Understanding exactly what investment you are making, and with whom, has never been more critical.”
Asset managers are calling on governments and regulators to set standardised guidelines and to create “data pools” providing a one-stop shop for sustainability information. This would drive investor confidence in ESG investments, knowing their impact is measurable and reported.
Our report also finds a new, broader concept of ‘value’ is needed, which reflects more than just commercial outcomes and recognises other factors, for example, alignment to the UN’s Sustainable Development Goals (SDGs). While asset managers have a fiduciary duty to provide financial returns, many also hope to see sustainability be recognised as a valuable outcome in itself.

There Are Many Investment Paths to Sustainability

​Industry and governments will need to lead a concerted global effort to measure ESG impact – recognising the many forms “impact” can take. Unfortunately, recent regulatory initiatives have focused on exclusionary policies barring investments in “brown” industries from being recognised as sustainable. This runs the risk of becoming a blanket ban, barring ESG-minded investors from engaging with entire industries. It is also giving up on the improvement potential of “brown” companies.
In the words of a Head of Sustainability for a large global asset manager: “Exclusion policies are too much of a blunt tool. A better outcome would be for me to invest in a company with a low ESG score today but with the objective of becoming a good ESG performer in the future. What happens to those that are excluded from the indices?”
To avoid the multiplication of greenwashing accusations on one end and an arbitrary blacklisting of industries on the other, the report suggests accepting multiple routes to sustainability. This means recognising that ESG investment strategies can look different yet reach the same goals.

Partnership for a Better Tomorrow
In conclusion, our report’s encouraging takeaway is that asset managers are ready and willing to advance the green transition and want to partner in this effort with governments and regulators. They call for greater harmonisation of evaluation approaches and access to better, more granular data. This data should come from providers that are regulated like credit reference agencies. And investors believe they should be allowed choice in their investment approaches, as long as sustainable development is achieved and recorded in data. The hope for a singular focus on outcomes to drive the next wave of sustainable investments.
There is a real opportunity for the financial industry and governments to partner on a new, more impactful approach to ESG investing. It’s up to us to drive this collaboration forward, looking to build a more sustainable world for all.

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It’s High Time to Build a Truly Integrated EU Capital Market

It’s High Time to Build a Truly Integrated EU Capital Market

Hands up if you want up-and-coming European companies to have sufficient access to the money they need to grow and to drive prosperity across the EU?  

It’s a no brainer – and one of the reasons why European politicians and regulators are keen to push forward the Capital Markets Union (CMU). 

Here’s a couple of details to flesh out the argument: equity finance in Europe is 67% of the eurozone GDP versus 125% in the US. More than two-thirds of lending to small and medium (SME) sized business in the EU comes from banks. 

 A simple analysis suggests it’s a lot harder for companies to raise money on the capital markets in the EU than in the US, leading to lower levels of investment and growth for the businesses and the EU as whole. 

The Capital Markets Union is essential for building up a stronger equity culture in Europe and for opening up or expanding other sources of capital for financing. And, a more diversified financial system is also more resilient and stable.  

In the words of the European Commission itself, the CMU will ‘’provide businesses with a greater choice of funding at lower costs and provide SMEs in particular with the financing they need’’. It also paves the way for deeper economic integration between member states. 

All market participants can help reach this goal of a stronger and more diverse European capital market – from long-term investors such as pension funds and asset managers, to independent  market making firms who jointly make up the FIA European Principal Traders Association (FIA EPTA). 

Market makers help to ensure end-investors get a better deal when they execute their investment decisions; they are estimated to provide up to 45% of the on-exchange liquidity in EU capital markets.  

“Market makers help to ensure end-investors get a better deal when they execute their investment decisions; they are estimated to provide up to 45% of the on-exchange liquidity in EU capital markets.”

By improving the quality of the secondary markets, market makers help to create the conditions that are key for companies looking to raise the capital that funds innovation, jobs, and growth for the European economy. 

Market makers enthusiastically support the CMU. Proportionate regulation of the financial markets is key to achieving the twin goals of strengthening economic growth and ensuring financial stability. Currently, there’s a very important piece of regulation going through the policy-making process:  

Newly launched initiatives by the European Commission, are bringing fresh energy to tackling the above points under the umbrella of a new CMU Package. European market makers strongly support these efforts, and in particular those that look to update the regulatory rulebook for the trading markets (the so-called MiFIR Review), as critical to achieving more efficient markets to support economic growth . 

European market makers see  three key areas where ambitious policy action is required to ensure European capital markets can make a greater contribution to the EU economy. These are: 

                    1. Building a truly integrated  EU single market for financial instruments – for which  a properly designed and executed pan-European Consolidated Tape is critical. Europe needs a utility-type single price ticker that offers real-time, post-trade price information enabling end-investors to have a full and democratised overview of European trading markets. 

 FIA EPTA will continue to advocate for real-time post trade Consolidated Tape that that is equally comprehensive across equities, ETF, bond and derivatives markets. 

                     2. To improve data quality and transparency in European equities, bonds and derivatives markets. This will help end investors to make better informed trading decisions as the price formation process is improved and search costs are lowered. Nowhere is this more needed than for post-trade data in the EU bonds market.  

We welcome the European Commission’s proposal to harmonise the delays by which post-trade price information is made public in the bond and derivatives markets, the so-called deferral regime – Now it’s also critical to ensure the transparency regime does not become overly complex and fragmented by applying different time deferrals. Based on market experience, we suggest a consistent 15-minute deferral as an appropriate length. Alongside, we advocate for a volume masking regime so that investors with large positions are properly protected without hampering the efficiency of the price formation process through unduly reduced transparency.

                    3. Strengthen investor protection standards, so that retail investors can have justified trust in their intermediaries not to be exposed to corrosive conflicts of interest or suboptimal order execution in non-competitive markets.  

The EC’s proposed ban on  Payment for order flow (PFOF) practices as currently allowed in some EU markets rightfully intends to address these concerns. However, the current draft is ineffective, and loopholes need to be closed to prevent unfair competition and protect retail investors. To guarantee fair competition between market participants as well as best execution for end clients. all direct and indirect monetary and non-monetary inducements and all possible execution and routing scenarios need to be included.

In sum: the proposed MiFID / MiFIR II review proposals are an important step forward to a CMU that benefits all Europeans. European market making firms are committed to sharing their on the ground knowledge and working with officials towards greater accessibility, transparency, and choice for end-investors  

We are resolute in our desire to see the CMU spark true integration and new momentum for capital markets activity  across all Member States, including those that are currently underserved (and underused). This will benefit economic and talent growth everywhere in the EU – not limiting it just to the leading centres as is the case today. Reforms take time, but it’s important to get it right as we level the playing field and open up a new era for European capital markets.