ESG, the new Nirvana for investors
ESG, which started out as an additional layer of analysis added to financial analysis, has in recent years become the new Nirvana for investors. ESG has become the foundation of socially responsible investing (SRI), a term with multiple meanings. Investors have excluded a range of less sustainable sectors, integrated ESG to varying degrees into their investment process, and striven to have a positive impact on society, although these aspirations are not precisely defined. We have seen a proliferation of investment funds offering a very wide range of strategies with a common claim: sustainable investment.
You shall not invoke “sustainability” in vain
The new EU rules aim to provide investors with a clear picture of how asset managers promote ESG and pursue sustainable objectives in the investment products they offer. There are three levels of sustainability.
- For the first group of asset managers, sustainability risks such as climate change do not have an impact on their portfolios. These products therefore do not incorporate ESG elements or any sustainable objectives.
- The second category analyses environmental and social sustainability risks and promotes and integrates favourable ESG characteristics into its products, taking into account good governance practices.
- Asset managers in the third category develop their investment products in a way that not only integrates ESG aspects, but also aims at sustainable investment. Only asset managers in the third category will now be able to display a sustainable investment label.
What does this mean in practice?
- ESG investment means that ESG criteria are assessed and that the investment policy of the product integrates environmental or social elements in compliance with good governance rules, but without pursuing a concrete sustainable development objective.
- Sustainable investment is limited to investments in an economic activity that contributes to an environmental objective, e.g. the use of renewable energy and the circular economy, or in an activity that contributes to a social objective, i.e. an investment in human capital.
Sustainable investment also means not significantly undermining another objective and always respecting good governance practices. Sustainable investments must therefore not harm the environment or violate labour or human rights. They must also fight corruption. This is important to note, as all the criteria must be met. We cannot sustainably invest in companies that provide a solution to an environmental problem but that use questionable labour practices.
Sustainability at Degroof Petercam
A family business cannot thrive for 150 years without sustainability being deeply embedded in its DNA. Good governance and respect for clients and employees are the best way to run a bank in the long term. Environmental protection has been added to this approach in recent years and is playing an increasingly important role. Our first strategies excluding unsustainable activities were implemented in 2001. In 2011, the integration of sustainability risks accelerated when Degroof Petercam Asset Management signed the United Nations Principles for Sustainable Investment. Signatories to these principles commit to systematically integrate ESG analysis into their investment process and engage in active dialogue with the companies in which they invest regarding ESG challenges.
The impact on your portfolio
Monitoring sustainability risks and their impact on financial performance has been part of the investment process for many years in private wealth management. The impact of the new rules on your investment portfolio will therefore be quite limited. The way in which Degroof Petercam Private Banking integrates ESG is set out in the Global Sustainable Investment Policy, a systematic process which, based on information provided by qualified analysis firms, provides our investment teams with a non-financial analysis that enables them to determine the exposure of companies to significant sustainability risks and how these companies are managing these challenges. In addition, at least 1/3 of our discretionary portfolios will be composed of companies that meet strict ESG standards.
What about sustainable investments?
For our sustainable portfolios, we invest in companies making a lasting positive impact. An increasing number of our clients want to invest exclusively in companies of this type, while being aware that this choice limits diversification between different economic sectors and that the investments will be mainly in growth companies.
The demand for investments with a visible positive sustainable and social impact is increasing because, the launch of the Sustainable Development Goals and the introduction of specific European rules in the SFDR, have established for the first time a clear framework for determining what actually constitutes a positive impact.
Sustainability in the broadest sense continues to grow in importance, and we welcome this development in terms of our societal role. In our fiduciary role as guardian of your assets, we have long been convinced of the added value of a sustainability analysis. The new rules of the game only reinforce this belief, and we will be happy to discuss this with you.