Investment Trends

As Regulation Tightens, European Asset Managers Must Uphold ESG Claims

Managers’ investment practices should match their claims in areas such as climate and biodiversity

A new report from Cerulli Associates assesses the demand for ESG strategies from different investors, the most popular themes in the space, and investors’ manager selection frameworks. The report also outlines emerging themes and evolving regulation across the region.

January 18, 2023, LONDON—Cerulli Associates’ latest report, European Environmental, Social, and Governance Investing 2022: Where to Now? examines greenwashing in the European asset management industry. The research finds that not all claims of sustainability are consistent with the underlying investment strategy amid the significant increase in the number of environmental, social, and governance (ESG) products available in Europe over the past five years.

To address the issue of greenwashing, regulators across the region are increasing their scrutiny of sustainable funds. For example, the Financial Conduct Authority in the U.K. plans to introduce rules that will limit fund managers’ use of ESG-related terminology to ensure alignment with their proposed sustainable strategies and objectives.

“Despite the prevalence of greenwashing allegations in the asset management industry, few managers have been fined,” says Justine Deveikyte, director. “However, this may change as the regulation around sustainability claims becomes clearer. Asset owners support punitive action—85% of the institutional investors are in favor of fining managers that engage in greenwashing practices.”

As the regulatory pressure around greenwashing continues to build, asset managers are downgrading their categorization of funds under the EU’s Sustainable Finance Disclosure Regulation from Article 9 to Article 8. Article 9 funds that invest in fossil fuels and nuclear will also face increased scrutiny. Managers should make qualitative assessments of Article 9 holdings that are not sustainable and work with portfolio managers to rebalance portfolios to make sure that the 100% threshold is met.

Focus On Biodiversity

Another area of focus for both asset managers and asset owners is biodiversity. COP27 highlighted that without protecting and restoring nature there is no feasible path to limiting global warming. Only 17% of the European asset owners currently target biodiversity-themed strategies when investing sustainably, but 57% plan to invest in broad thematic ESG strategies with a biodiversity focus in the next 12 to 24 months.

To manage biodiversity risks and opportunities in their portfolios, most asset managers and institutional investors exclude companies in biodiversity-sensitive sectors. Two-thirds (67%) of institutional investors and more than half (55%) of the asset managers we address biodiversity risk through exclusion.

Commitment To Reaching Net-Zero

In addition, Cerulli believes it is essential for asset managers that sell into Europe to commit to reaching net-zero. Almost all institutions across Europe agreed that a commitment to net-zero is at least somewhat important in their manager searches—83% of Scandinavian respondents consider it very important.

“Managers’ net-zero commitments are important to institutional investors. As such, the conversations have moved from simply claiming to be committed to reaching net-zero to actual net-zero targets and how to achieve reductions in emissions,” says Wouter Bakker, senior analyst. “In terms of reporting climate change risk, most asset owners in Europe expect managers to report their exposure to energy transition as well as the physical climate risks and the carbon footprint of their investment portfolios.”

 

 

 

Methodology
Cerulli’s analysis is based on proprietary research, including more than 50 interviews with prominent international asset managers, private banks, asset owners, service providers, and other players on responsible investment topics conducted throughout 2022.
The report offers quantitative analysis based on several proprietary Cerulli surveys of asset managers and institutional asset owners. In total, 49 asset managers completed our ESG survey. Of those respondents, 41% were managers with AUM between €1 billion (US$1 billion) and €50 billion, 24% were managers with AUM between €51 billion and €100 billion, and the remaining 45% were large managers with AUM of €101 billion and more.
A total of 210 institutional investors evenly split across the U.K., France, the Nordics, the Netherlands, Germany, Italy, and Switzerland completed our ESG asset owner survey. Of those respondents, 57% were pension funds, 31% were insurers, and 12% were endowments and foundations. Our survey included a mix of smaller and larger asset owners: 4% of respondents were investors with AUM between €500 million and €1 billion, 57% were investors with AUM between €1 billion and €5 billion, and the remaining 39% were large investors with AUM of €6 billion or more.
About Cerulli Associates
For over 30 years, Cerulli has provided global asset and wealth management firms with unmatched, actionable insights.
Headquartered in Boston with fully staffed offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.

 

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