[ U P D AT E ]
Change of ESG
approach by
ESMA welcomed
by asset
managers
FEARS THAT ASSET MANAG-
ERS WOULD BE FORCED TO
ARBITRARILY UNWIND POSI-
TIONS IN NON-SUSTAINABLE
COMPANIES HAVE BROADLY
SUBSIDED FOLLOWING ES-
MA’S ANNOUNCEMENT.
T
he European Securities and Markets
Authority (ESMA) has seemingly put on
hold the idea of pursuing a prescriptive ap-
proach towards its ESG (environment, social,
governance) policy initiative in favour of a
more principles-based method.
The regulator said proposals for asset
managers to integrate sustainability risks
into their investment decision-making
should be flexible, according to a consul-
tation released at the end of December.
The clarification will be welcomed by fund
managers, a number of whom were initially
alarmed that the initial proposals appeared
to be overly rigid.
Conscious of the growing investor demand
for ESG products and the genuine need to
encourage financial institutions to play a
meaningful role in meeting the objectives
outlined in the Paris Climate Agreement,
the European Commission (EC) announced
an Action Plan on Sustainable Finance in
2018.
The proposals recommended asset
managers integrate sustainability into their
investments, and laid down a framework to
create a watertight ESG taxonomy, a tool
which could be used by clients to benchmark
managers on their sustainability and elimi-
nate the risk of greenwashing arising.
However, fears that asset managers would
be forced to arbitrarily unwind positions in
non-sustainable companies – along with
concerns about adhering to an excessively
uncompromising taxonomy – have broadly
subsided following ESMA’s announcement.
Firstly, ESMA acknowledged that rigid ESG
rules were inappropriate given that sus-
tainable investing is still a fairly embryonic
strategy subset and a continuously evolving
one at that. It also conceded such a policy
would put Europe at a competitive disad-
vantage by creating barriers to ESG market
development.
Furthermore, ESMA said the integration
of sustainability risks within UCITS and
AIFMD (Alternative Investment Fund Man-
agers Directive) “is better done through a
high-level principles-based approach similar
to that already followed for a number of
other relevant risks such as interest rate or
credit risk.” ESMA is therefore recommend-
ing that impacted fund managers incorpo-
rate sustainability risks into their standard
investment due diligence processes.
Nonetheless, ESMA stated investment
managers will need to rewrite some of their
firm-wide risk management and due dili-
gence policies and procedures in accordance
with the rule-changes.
“Authorised entities should carefully con-
sider whether they have sufficient human
and technical resources for the assessment
of sustainability risks within their organ-
isation and governance structure. It is
important that authorised entities employ
individual(s) that possess the relevant skills,
knowledge and expertise in sustainability
risk,” added the ESMA consultation.
The pursuit of ESG mandates is a big
business for fund managers, with sustain-
able strategies accounting for around $22.9
trillion, according to the Global Sustainable
Investment Alliance, and is forecast to grow
even further.
State Street Global Advisors’ research
found 50% of ESG investors plan to increase
the degree to which they incorporate ESG
into their portfolios over the next three
years, while 23% of non-ESG investors
intend to add ESG. Notwithstanding ESG
demand among millennial clients, asset
managers see sustainable investing as a
tool to fill the capital raising void.
Spring 2019
globalcustodian.com
17