Sustainable investments - from niche to mainstream

Sustainable investments were long viewed as a niche asset class, however, for the past 5 years mainstream financial firms such as Goldman Sachs and Blackrock (ex: Impact US Equity Fund) have launched investment products which are ESG compliant. For many, the main challenge before it truly becomes open to any investors is that there isn’t yet a definition to what makes an investment sustainable[1]. Indeed, there is an absence of concrete guidance and no real audit system of the different definitions portfolio managers may have of sustainability. However, transparency initiatives like LuxFLAG’s labels experience accelerated growth in certification requests from sustainable investment products.    

Still, more and more investors value sustainability. According to research[2], 75% of investment firm managers agree that a company’s good sustainability performance is materially important when making investment decisions. Moreover 87% would say that it matters more to investors than 3 years ago.  It has now been proven that sustainable investments make on par or better returns than the average market benchmark and that it exists a positive correlation between sustainability and stock prices[3].

In the last 2 decades the number of US funds incorporating ESG criteria have increased dramatically from 55 funds in 1995 to 1002 in 2016^[4]. Over the same period the increase is even more vivid in the total US domiciled assets with a compound annual growth of 13.25%, from nearly $0.8 trillion to $8.72 trillion^[5]. Between 2014 and 2016 the growth was of 33%, demonstrating the exponential aspect of the demand for such investments. Furthermore, half of this total is held by institutional investors.

In addition to the ESG and SRI funds, the road to sustainable growth via the issuance of green securities (also referred to as “Green Bonds”) appears to be simple and straightforward in application when looked from the outside considering the huge growth that these securities experienced since 2007, date of the first issuance by the European Bank of Investments (“EIB”) in Luxembourg.

In practice, no clear guidance nor standards are in place nowadays with regard to the issuance of Green Bonds and, although investors are positively looking at Green securities, there is still no observable assurance that projects financed by the use of proceeds of this type of securities are indeed Green (“Green Projects”).

On the other hand, issuers of Green Bonds are still trying to navigate a framework that is relatively new and not fully regulated by clear and exhaustive standards.

In this universe, where stakeholders approaching these environmental criteria, they would need an independent third party to assess, review or certify, when necessary, that these securities stand their promise and that the use of proceeds derived from these bonds are monitored and reported against actual Green Projects.

François Génaux, Financial Services Consulting Leader at PwC Luxembourg said:

“As the leading professional services firm in the Luxembourg fund industry, we are eager to identify and share the best practices and latest solutions that can help asset managers and their services providers to enhance their investor solutions. Joining forces with IdealRatings will help us deliver the right strategy to the market players. In particular, we’ll be able to screen their investment universe against customized guidelines and criteria applied on different asset classes whether they are equities, fixed income, REITs or indexes.”

Mohamed Donia, CEO, IdealRatings Inc., comments:

“We are extremely enthusiastic about the recently launched Joint Business Relationship with PwC Luxembourg. As a leading provider in the research and screening industry, IdealRatings commitment has always been to provide our clients with valuable services and we are confident that joining forces with such a leading professional services firm will amplify the range of services and benefits offered to both PwC and IdealRatings top-tier institutional clients”

In that context, PwC and IdealRatings have joined forces to bring new and innovative services in the field of screening ESG, SRI and Faith based investments. This joint efforts will be also useful for those asset managers / issuers who are seeking labelling or certification of their funds or bonds.

PwC Luxembourg

 

LuxFLAG Newsflash April 2017

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