Sustainable Equities Boutique

Profits with principles: SFDR enables a clearer choice on “clean tech”

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Sustainable Investing

Remember the co-ordinated waves of crowds cheering in sports stadiums? Those days are gone, but the sustainable investment industry’s own celebratory wave shows no sign of abating – and for good reason. However, new European regulation will start guiding investors towards the products that are really worth rooting for.

On March 10 2021, tight new rules known as Sustainable Finance Disclosure Regulation (SFDR) take effect in the European Union, cementing the region’s reputation as a trailblazer (or cheerleader in sporting terms) for sustainable investments. They introduce a uniform requirement of eco-labelling financial products and reporting obligations1 that will force market participants and financial advisors to be much more transparent when promoting financial products as sustainable.

The relevant passages in SFDR regulation are article 8 and 9. The former, which sports a light-green leaf for logo, is given to financial products that promote environmental or social characteristics. The latter, the stricter version that comes with two dark-green leaves, is bestowed on products with a sustainable investment objective. Likewise, investment firms will need to provide details of policies on the integration of sustainability risks and objectives in their investment processes and how their products actually meet the ESG claims they make. For example, there will be an evaluation to what degree asset managers’ investments live up to the environmental and social standards the company claims to be supporting.

EU Green Deal will spark massive investments

Investors and asset managers with a sustainability focus will welcome the development. On the one hand, the tightening of the regulatory screws will increase competition. On the other hand, the European initiative will not only lead to a “green” classification system for financial products (equity investments as well as standards for green bonds), it also comes with a multi-billion plan to become carbon neutral by 2050. Known as European Green Deal, this push includes the so-called EU Taxonomy, a classification system to distinguish “sustainable” from “non-sustainable” economic activities. The initiative will spark massive investments in the clean tech corporate sector, which will ultimately lead to investment opportunities for the financial industry.

We for our part recognized that the six environmental objectives at the core of the EU Taxonomy (e.g. mitigation of and adaptation to climate change, protection of water resources, the transition to a circular economy) are mostly aligned with the United Nations’ Sustainable Development Goals (SDGs)2 as well as our own so-called impact pillars (see table below). This convinced us that our Clean Technology product would qualify for the highest-possible category under the SFDR scheme (an “article 9” product). 

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What have we learned in the past 12 years since launching this product? Back then, there were no SDGs, and impact investing was associated with private projects or philanthropy. While not using the term impact investing initially, we knew from day one what we wanted to do: invest in companies that improve our daily lives, help to minimize our ecological footprint and offer attractive investment opportunities. The six impact pillars described above, unchanged since 2008, have always guided our steps. Over time, we developed new environmental metrics. Five years ago, we started measuring what we call potentially avoided emissions. Three years later, we introduced a comprehensive set of key performance indicators to gauge our portfolio companies’ contributions to environmental and social improvements.

Money matters, but “doing good” too

We are investors, so competitive returns are important. However, we have also learned that money isn’t everything – people often want to wed their investments to a beneficial environmental or social outcome. Younger generations are more eco-conscious than the more materialistic baby boomers, not the least because of global challenges such as climate change and pollution. Even so, millennials will inherit more than 70 trillion US dollars from their parents, one of the greatest wealth transfers ever. The shift in mentalities will increase the flow of money into financial products with green credentials. A growing awareness of global problems is changing the mindset of institutional investors too, who increasingly align their allocation with the UN’s development goals.

We believe it is possible to do good while doing well. Multiple independent studies as well as our own research show that, in the long-term, the performance of impact investing is comparable to traditional investing. Portfolio performance overwhelmingly meets or exceeds investor expectations for environmental impact and financial return.

What gets measured gets done

Measuring the beneficial environmental or social impact of financial products is challenging and complex due to the lack of standards. But data availability is improving and will continue to do so, not only owing to increased regulatory scrutiny, but also because we and other asset managers continue to nudge companies to improve transparency. The financial industry’s measures to assess portfolio companies’ sustainability may not be perfect, but not-quite-perfect yardsticks are better than none. As we improve measuring methods such as our impact calculator showing nine different environmental outcomes – the figures change dynamically with the amount the investors is willing to allocate, and from time to time as our portfolio develops – we are learning as we go along.

Profits with principles

To return to our introductory example, we’re definitely cheerleaders for sustainable investments. Whilst SFDR may not be perfect, it is definitely a useful step towards enabling investors to make clear choices about what their money supports. And not just for ethical reasons. With the advent of the EU Green Deal and other similar schemes globally, investors should be able to combine profits with principles.

1. See Vontobel Insights: “EU Sustainable Finance Action Plan – Carbon Neutral by 2050?”, June 10, 2020 https://am.vontobel.com/en/insights/eu-sustainable-finance-action-plan-climate-neutral-in-2050, or “The EU action plan – greater transparency in the area of sustainable investments”, June 24, 2020 https://am.vontobel.com/en/insights/the-eu-action-plan-greater-transparency-in-the-area-of-sustainable-investments For background reading, see, for example, “Sustainable finance Disclosure Regulation – is the financial industry ready for the Big One?”, Deloitte 2020, https://www2.deloitte.com/lu/en/pages/sustainable-development/articles/sustainable-finance-disclosure-regulation.html, or “Sustainable Finance Disclosure Regulation (SFDR), PwC, 2020 https://www.pwc.ch/en/publications/2020/sustainable-finance-disclosure-regulation.pdf
2. The Sustainable Development Goals, 17 initiatives to improve environmental and social conditions for the world’s population, were adopted by 193 countries in 2015. The SDGs, currently the only globally accept sustainability-linked guidelines, are to be achieved globally and by all member states of the United Nations by 2030.

For further information on performance and investment considerations regarding funds included in this Insight, please click on the respective "Related Funds" below.