Today, the world faces a pivotal moment and needs to make some momentous choices. How do we not only build back what was lost, but improve on it as well? Whilst the levels of debt was already at all-time-highs in several economies before the pandemic, we are now confronted with claims for monumental relaunch programs, which will lead to further unprecedentedly-high public debt levels. In this context of low interest rates, a potential slight pick-up in inflation, and the need for an economic transformation, we are left to wonder how we fit in sustainable investments?
ESG factor integration proved its added value during the 2008-2009 crisis, which was mainly a corporate governance crisis. It has done so again during the sanitary crisis and the resulting lockdown. This has highlighted why it is so important to assess the potential impact of all stakeholders when making investment decisions at every level: economic, currency, environmental, social and governance. These dimensions are all interconnected and there is no reason for this to change in the coming months, if not years. Indeed, this interconnection has been reinforced over the years through globalisation and technological disruption. This is a structural trend, observed among investors, economic actors, consumers and regulators. There is an urgent need for a profound transformation, not only in terms of resource management, but also in terms of human capital, where innovation plays an important role in creating a balanced ecosystem.
On the environment side, important economies, like China, the US, the EU, and Japan, among others have committed to ambitious climate programs that aim to achieve carbon neutrality by 2050/2060. This impact is no longer limited to sectors like energy, utilities and materials, but now concerns all sectors. The shift to a low-carbon economy is both a material risk and opportunity for all economic actors. Besides the huge climate challenge, we also need to keep in mind the social dimension. The combined health issues and economic shocks caused by the sanitary crisis are raising important questions regarding the delicate balance between priorities that are critical for the short-term revival and those critical for the longer-term transformation towards a sustainable future. Those who have not yet integrated this are unlikely to survive in the short term. This is the aim of sustainable investments: to distinguish those who have already started their transition journey.
The EU has clearly set the tone regarding sustainable investments and its willingness to position itself as leader on this topic. In 2016, they took the lead with their Action Plan for Sustainable Finances, which focused on three main objectives: fostering a long-term focus on the economy, financing sustainable growth and integrating environmental risks as a systematic investment risk. All regulations that have been adopted since then have been pursuing these three targets. In addition, the SFDR and EU Taxonomy pave the way to sustainable financial future and deals with the lack of standards and common definitions. However, the EU needs to avoid the unwanted effects of a regulation that is too rigid and inflexible. Indeed, this could lead to an excessive and potentially-counterproductive set of procedures, administrative burdens and reporting hurdles.
As we take a look at the current state of the SFDR, we can identify some weaknesses from the first level implementation:
