The COVID-19 pandemic triggered unprecedented interest in ESG investing. This has highlighted a divide between the practices of large parts of the investment industry and the expectations of many environmentally and socially minded investors. There is a huge information gap on key issues, with greenwashing as an inevitable by-product. But recent research by Platforum points to promising signs that this gap is gradually closing – with potentially wide consequences for the retail fund industry.
Growing investor awareness on environmental and social issues is driving demand for information about the impact of investments. And then there is regulation. Amendments to MiFID II will come into effect in August 2022. These will require distributors to ask clients about their sustainability preferences and find appropriate investment products. The UK’s FCA is likely to follow suit.
There is currently little clarity on how distributors will be supposed to implement the new rules. However, developments around ESG data might provide the ground for highly transformational solutions over the medium term. ESG data providers, traditionally focused on the manufacturing side of the industry, are increasingly looking at distribution.
Investment managers have so far mainly focused on how the companies held by their funds are managing ESG-related risks. End investors are more concerned with ESG-related outcomes. Crucially, data providers are now developing metrics that directly address end investors’ concerns.
ESG data are gradually being ‘translated’ into stories investors can understand, often using the framework provided by the UN’s Sustainable Development Goals. It is early days in this process, but a look at the evolution of fund flows since the start of the pandemic shows that growing investor awareness on key ESG issues can have a profound impact on the supply and demand of retail funds.
We are publishing today our Impact of ESG on European Fund Distribution report. For more information, please get in touch.