The New Sustainability

Diverging US, EU ESG Regulations Could Impact Fund Returns

By translating into differing investment considerations, risks and potential returns over the longer term

Fitch Ratings-London-11 September 2020: Divergence between U.S. and EU/UK regulations regarding sustainable investing is increasing, as seen with the disparate interpretation and application of Environmental, Social and Governance (ESG) rules for pension funds, Fitch Ratings says.

The diverging regulatory paths are unlikely to converge in the near term given the U.S. Department of Labor’s (DOL) historical conservative stance amid the evolution of ESG investing in the EU/UK. While these differing approaches are not expected to immediately affect ratings assigned to investment managers, pension funds and/or the institutions sponsoring such plans, we anticipate they will translate into differing investment considerations, risks and potential returns over the longer term.

Fitch expects the long-term structural trends in favor of ESG investing to persist. Funds that invest in line with ethical principles attracted USD59 billion of inflows globally for the first half of 2020, bringing the total of ESG assets under management to USD2.2 trillion globally, according to Lipper.

The shift in social and political attitudes that has fueled demand for sustainable investing is accelerating as investors, public institutions and corporations increasingly prioritize ESG measures as part of their investment criteria. Growth has been also driven by market participants the increased belief that ESG factors can have material impact on long-term investment returns.

Total Global Assets Under Management