For sustainable investors in the U.S., the last two years have been about backlash – the rise of political and corporate voices that oppose ESG requirements or regulations. But outside the U.S., the story is a little different.
Our Aha Moment this week is that, particularly in the European Union (EU), a sustainability mindset is continuing to drive new ideas and new investment strategies.
EU-based funds aren’t generally available in the U.S. But within the sustainability space, they are leading the way. We think there’s a lot to be learned from tracking the way EU-based funds are evolving.
A frozen ESG landscape in the U.S. vs. progress through collaboration in the EU
As most sustainability oriented investors are aware, ESG investing has become a polarizing issue in the U.S. Despite the undeniable appetite among American investors for sustainable options, political leaders have frozen regulations intended to address ESG issues, concerned that they may infringe on free-market practices or impose undue pressure on corporations.
In contrast, the European Union has accepted sustainable investing within its financial ecosystem. While there is still a tug of war playing out between corporate, investor and regulatory interests, the key players in the EU have looked for ways to advance sustainability goals. These include:
- Evolving regulation: New measures, such as the Sustainable Finance Disclosure Regulation (SFDR), are providing investors with visibility into the environmental and social impacts of their investments.
- Improved ESG data: Disclosure requirements and advancements in data analysis have made it easier for European investors to make more precise evaluations around the ESG impacts of corporate activities.
- Modern frameworks: There are several evolving frameworks that establish standardized guidelines that investors can use when evaluating corporate ESG performance.
Examples of EU ESG innovation
“Product innovation in the EU has been very much driven by regulation,” says Hortense Bioy, CFA, the London-based head of sustainable investing research for Morningstar Sustainalytics. “But also, new and better data disclosures have driven product development. As data disclosure improves at a corporate level, you can build new strategies that use that data.”
Bioy offers several examples of recent EU funds that are emerging from the European ESG environment.
EU climate legislation has catalyzed the creation of new benchmark indexes, such as Paris-aligned benchmarks and climate-transition benchmarks. Investment companies use these indexes to design products tailored to sustainability objectives. Two newer ones:
- The Amundi MSCI World SRI Climate Paris Aligned UCITS ETF allows investors to support companies dedicated to meeting Paris Agreement goals.
- The iShares MSCI USA ESG Enhanced CTB ETF integrates Climate Transition Benchmark principles to address carbon reduction targets.
European investment companies are also developing products built around new or improving ESG metrics:
- The Wellington Climate Strategy Fund invests in companies utilizing advancing science-based targets for net zero emissions.
- The iShares MSCI USA Climate Transition Aware UCITS ETF aligns with emissions reduction targets approved by the Science Based Targets initiative (SBTi).
There are also entirely new frameworks. For example, the Jupiter Responsible Income Fund is a strategy largely built around the Net Zero Investment Framework (NZIF). It requires each holding to fit within specific sustainability categories identified by the NZIF.
Global implications
These specific products are exclusive to European investors, but they can provide a peek into the future for those of us in the U.S.. “Some of these investment options give European investors a sense that there’s a way to hold companies accountable,” says Bioy. “It can be a way of making a difference.”
We also think there’s a bit of an Aha Moment in noting how many of these ESG innovations are offered by global investment leaders who manage U.S.-based funds.
These fund providers may be cautious about moving forward with ESG innovations in the midst of today’s debates, but they are keenly observing the evolution of ESG data and regulation. It suggests that they are positioning themselves to introduce similar products in other markets, including the U.S., as circumstances permit.
More of The Aha Moment: The growing market for faith based investments
