Sustainability in the asset management industry

Dominik Hatiar
Former Advisor, European Fund and Asset Management Association

Investors worldwide are more aware of ESG standards each day. So how is EFAMA supporting its members to adapt to this new reality?

Our number one task is to help our members adopt the Sustainable finance disclosure regulation. It’s about making sure that when a fund manager discloses ESG credentials of that fund, the ESG standards involved are actually mentioned. This is an excellent tool against greenwashing. We are getting to a phase where we will rely on specific indicators, universally accepted across the industry. Based on these indicators, investors will be able to compare asset management companies and funds they’re planning to invest in, with at hand their real-world impact indicators.

How vulnerable do you think the asset management industry is due to the lack of data?

Information asymmetry is typical for financial markets. And we will not get to a situation where we have ideal and precise information about all the ESG credentials of all companies. The situation we have now is suboptimal. Companies are not reporting on their indicators, or when they do report then it is based on inherently inaccurate estimations. So: how do we solve this challenge? We’re looking with high hopes towards the corporate sustainability reporting directive, which expands the number of entities that will report against ESG information at the European level. The EU taxonomy also provides technical screening criteria for every environmental impact. In the MEA region, it seems that it will enable ESG reporting. So, suppose there is a company in the MEA region producing solar panels or that believes it can report on an excellent ESG performance – that will be possible from now on.

Could you explain how EFAMA supports its members in incorporating CSR in the assets and financial management process?

Asset managers have a responsibility towards society in allocating capital towards green companies. So it is essential for us to ask the right questions to the board members in terms of environmental impact. It all boils down to engagement with that management of companies – to assess if these companies are motivated to decarbonize. It would be best if we had climate resolutions at the general assemblies of those companies. It is important to have engaged company owners who support the board with a corporate and socially responsible business strategy.

What about small to medium-sized companies and actors in terms of ESG standards?

When it comes to SMEs, the difficulty is to have something universally compatible without this becoming a red tape for them. For example, when we talk about climate, it is clear that the smaller SMEs are not the companies responsible for most greenhouse gas emissions. Yet, there are other environmental problems and social problems they face – ranging from biodiversity protection to inclusion, and those SMEs are underperforming. We haven’t yet found a way to drive better compliance with those standards nor impose those reporting requirements upon them.

The EU is now trying to develop some tailor-made standards for SME reporting, but this is a challenge.

How is the industry facing the challenge of providing investors with ESG robust and transparent information?

What will help a lot is the EU taxonomy. We will have an accurate science-based metric for what counts as “environmentally friendly”. There will be a natural drive to develop and manufacture products, which shows a high percentage of taxonomy alignment with some of the existing ESG funds. The second step is investor education around these new ESG concepts introduced. So, the person who advises how to invest the money as part of the suitability process will be asking the investor about their ESG interests and sustainability preferences.