Is Now The Time To Invest In Sustainable Funds?

At Metis Ireland, we take pride in helping our client families achieve their maximum return on life by sticking with our evidence-based investment philosophy.

A core principle of our Investment Philosophy is “Trust in Evidence Based Investing”.  Metis Ireland require years of proven financial performance data before we will consider adding a fund to our offering.

Recently, we’ve decided not to align our investment philosophy with sustainable funds just yet. Here’s why: the concept of sustainable investing lacks a universal definition. Under the umbrella of ESG (Environmental, Social, and Governance), there are various terms like responsible investing, sustainable investing, impact investing, and transition investing.

Let’s explore this further:

 

• 1. The Fund Managers

 

The top five fund managers globally are BlackRock, Vanguard, State Street Global Advisors (SSGA), JP Morgan Asset Managers (JPAM) and Fidelity.

BlackRock and Vanguard have taken very different approaches to sustainable investing.

Over the past five years, BlackRock has been at the forefront of ESG investing, initially championing the cause.

Larry Fink previously used his influential “Dear CEO” letter to call out the importance of ESG/sustainability.

Recently BlackRock’s stance has softened/reversed amid political pushbacks.

Vanguard took the opposite approach, declining to join many of the initiatives and leaving those they did shortly after.

I will briefly cover 2 of these initiatives below.

 

Climate Action 100+

Climate Action 100+ was set up to conduct joint company engagements and collaborate on shareholder proposals.

 

BlackRock, JPMorgan Asset Management and State Street Global Advisors joined in 2020.  Vanguard and Fidelity Investments never became members.

 

In 2023, Climate Action 100+ announced that it would be shifting from pressuring companies on climate disclosures to pushing them to actively reduce greenhouse gas emissions.

 

In 2024, JPAM and SSGA both confirmed they were leaving Climate Action 100+. BlackRock are pulling out as a corporate member and transferring its participation to their smaller international arm.

 

Therefore, Climate Action 100+ no longer has full participation of any of the top five investment managers.

 

Net Zero Initiative

The Net Zero Asset Managers initiative, launched in 2020, is a group of international asset managers who support the goal of net zero GreenHouse Gases (GHG) emissions by 2050 or earlier, in line with the Paris Agreement to limit temperature rises to 1.5°C.  Signatories also commit to support investing aligned with net zero emissions by 2050 or sooner.

 

Today, there are over 315 signatories with $57 trillion in AUM, however, Vanguard left the Net Zero Asset Managers initiative in December 2022.

 

• 2. The Regulations

 

Investing sustainably is complex due to the lack of clarity with everchanging regulations.

 

Sustainable Finance Disclosures Regulations (SFDR)

 

SFDR has been on quite a turbulent journey in achieving its goal of transparency for investors accessing sustainable financial products.

 

The introduction of SFDR II in 2023 saw a huge downgrade of funds according to Morningstar, 307 Article 9 funds were downgraded to Article 8 in Q4 of 2022, with a combined asset under management (AUM) value of €170.1 billion.

 

From speaking to several fund managers on this, they downgraded their funds to avoid the risk of greenwashing as they were awaiting confirmation if the Paris Alignment index fulfils the article 9 requirement.  This confirmation has seen funds returning to article 9 status however it has been slow due to the hefty paperwork and the SFDR consultation.

 

From September – December 2023, the European Commission had a consultation on SFDR. The purpose of the Consultation was to provide feedback to the European Commission on any shortcomings in the SFDR framework and options for improvement.  The feedback is currently in review.

 

European Securities and Markets Authority (ESMA)

 

ESMA (the EU Markets regulator) called out the various levels and types of Greenwashing in their review which was released in June 2023.   A previous blog relating to this:

 

https://metisireland.ie/what-is-greenwashing-anyway-esg-series-part-2/

 

It is expected a follow up on the greenwashing report will be published shortly.

 

• 3. The Funds in Action

Assessing the social or environmental impact of investment funds requires robust and standardised metrics, which are currently lacking. Without clear benchmarks, financial planners face difficulties in accurately evaluating the effectiveness and impact of sustainable investments.

 

According to the Global Sustainable Investment Alliance (GSIA), a staggering US $30.3 trillion was invested in sustainable assets globally in 2022.

 

In the last quarter of 2023, global sustainable funds experienced net outflows of $2.5 billion, marking the first time they entered negative territory.  Sam Adams of Vert Asset Management collaborated on a recent article titled ‘can esg come back from the dead’ and he noted that “you can almost erase all of the negative outflows to ESG to just one BlackRock fund – ESG Aware MSCI USA ETF”.

 

What Next?

 

Although there’s still scepticism, the regulatory environment is evolving rapidly making sure Sustainability is becoming a quantifiable business metric.

 

The Insurance Distribution Directive (IDD) requires financial planners to record new and existing clients’ sustainability preferences when advising on insurance-based investments.  This requirement may trigger a conversation/educational piece which ordinarily would not happen and may influence an investment choice.

 

• Expected ESMA guidelines will be published this year regarding fund names using ESG or

sustainability-related terms.  It is anticipated the guidelines will be immediate for new funds, existing funds will have a 6-month implementation period.  This should ease greenwashing and increase understanding levels.

 

CSRD (Corporate Sustainability Reporting Directive) will require an estimated 50,000 companies to disclose standarised data including sustainability related impacts, risks and opportunities arising from the company’s activities.  These disclosures will form part of the audit process and therefore standardise and streamline the data being reported. Data is expensive and it is difficult to find accurate, up-to-date and comparable data.  This directive could help address this issue.

 

While we may seem cautious about sustainable investing, we recognise its growing momentum and potential for positive changes.  We will continue to navigate the complexities of sustainable investing, exploring both its challenges and opportunities on the road to a more sustainable future.  As regulatory frameworks evolve and awareness grows, we anticipate a shift towards more informed and impactful investment decisions.

 

As climate change continues to accelerate, sustainability will have to become the norm. March 2024 was the warmest March on record globally, emphasising the urgency of sustainable investing in today’s world.

 

Mary Carney

Financial Planning Executive

 

Sources:

• • https://www.ft.com/content/3ce06a6f-f0e3-4f70-a078-82a6c265ddc2
  • https://www.financial-planning.com/news/can-esg-come-back-from-the-dead
  • https://www.netzeroassetmanagers.org/signatories/
  • https://www.morningstar.com/sustainable-investing/globally-esg-funds-suffer-first-ever-quarterly-outflows-fourth-quarter-2023
  • https://www.ft.com/content/5d98ca53-7572-4886-a1d6-b86eb5040924
  • https://www.responsible-investor.com/esma-to-publish-final-greenwashing-report-before-end-june/
  • https://www.etfstream.com/articles/invesco-upgrades-five-paris-aligned-etfs-to-sfdr-article-9
  • https://www.morningstar.co.uk/uk/news/231438/esg-fund-downgrade-accelerates.aspx
  • https://climate.copernicus.eu/copernicus-march-2024-tenth-month-row-be-hottest-record