Forskelle i USA´s og EU´s kommende ESG-regulering kan på længere sigt få stor betydning for investeringsbeslutninger hos institutionelle investorer, Generelt har skiftet til ansvarlighed skabt efterspørgsel efter bæredygtige investering – og det accelerere fortsat, da investorer i stigende grad prioriterer ESG som en del af deres investeringskriterier, skriver Fitch Ratings i en analyse. Men forskelle mellem US og EU regulering kan påvirke markedet.
Divergence between U.S. and EU/UK regulations regarding sustainable investing is increasing, as seen with the disparate interpretation and application of Environmental, Social and Governance (ESG) rules for pension funds, Fitch Ratings says. The diverging regulatory paths are unlikely to converge in the near term given the U.S. Department of Labor’s (DOL) historical conservative stance amid the evolution of ESG investing in the EU/UK. While these differing approaches are not expected to immediately affect ratings assigned to investment managers, pension funds and/or the institutions sponsoring such plans, we anticipate they will translate into differing investment considerations, risks and potential returns over the longer term.
Fitch expects the long-term structural trends in favour of ESG investing to persist. Funds that invest in line with ethical principles attracted USD59 billion of inflows globally for the first half of 2020, bringing the total of ESG assets under management to USD2.2 trillion globally, according to Lipper. The shift in social and political attitudes that has fueled demand for sustainable investing is accelerating as investors, public institutions and corporations increasingly prioritize ESG measures as part of their investment criteria. Growth has been also driven by market participants the increased belief that ESG factors can have material impact on long-term investment returns.
The DOL proposed a rule on June 23 for private pension plans governed by the Employee Retirement Income Security Act (ERISA) stating that private employer-sponsored retirement plans are not for furthering social goals or policy objectives but rather to provide for retirement security of workers. On Aug. 31, the DOL proposed a further rule that would require plans to cast shareholder votes only on issues that have an economic effect on a retirement plan, implying they may not vote on ESG-related issues unless they have a measurable financial impact. Approximately USD28.7 trillion of assets were managed under ERISA rules at 1Q20, according to the Investment Company Institute.
Public feedback and pushback against the proposed DOL rule noted that prohibiting ESG funds from being a default investment option in pensions would limit inflows and reduce the growth potential for ESG investing. Also noted was that the rule could lead to worse outcomes for retirees, as investment managers may not otherwise fully consider ESG risks. Respondents also suggested that both the U.S. and EU/UK rules conflate ESG integration strategies and economically targeted investments such as impact investing.
In contrast to the DOL’s approach, regulation in the EU and UK promotes the integration of sustainability and ESG concepts into financial decision making, which has become a more common and/or formalized consideration for pension fund managers. The European Commission’s proposed amendment to Markets in Financial Instruments Directive (MiFID) II rules would mandate that investment firms consider the ESG preferences of their retail clients when providing investment advice.
Still, the proposed amendment to MiFID II rules could increase the cost of regulatory compliance of investment managers and expose them to additional litigation and reputational risk if investment managers fail to meet or underdeliver the clients’ expected financial and non-financial targets.
The pandemic has done little to deter the expanding focus on ESG investing, as fund managers increasingly seek to invest in sustainability-conscious assets. Global ESG fund assets in 2020 have almost doubled since the end of 2015; Europe has a high share of global ESG funds (around 75%), while the U.S. accounts for around 20%. Fitch believes the growth of sustainability investing could be further accelerated by increased market standardization and transparency in terms of ESG scoring methodologies, common definitions and categorizations.