ALFI responds to European Commission inception impact assessment on institutional investors’ and asset manager’s duties regarding sustainability

4 Jan 2018 | Statements and Position Papers  

For the purpose of the present position paper, sustainability factors relate to environmental, social and governance issues as defined in the glossary of the public consultation.

As per the European Fund and Asset Management Association’s (EFAMA) paper entitled ‘EU Strategy on Sustainable Finance – Views from a European asset management perspective’, ALFI believes that the ‘asset managers’ fiduciary business model dictates them to invest in capital markets and projects based on their clients’, individual and institutional asset owners, investment guidelines and profile, best long-term interest’. As such, asset managers have a fiduciary duty to integrate ESG considerations into the investment process, when these considerations are financially relevant, or in other words, material. In this sense, the concept of fiduciary duty in Europe is already aligned with sustainable and responsible investment and we therefore do not believe that any specific legislation in this regard is necessary.

We believe asset managers shall have a duty to assess not only financial, but also extra financial criteria. This does however not mean that extra financial criteria necessarily need to flow into the investment decision process in a specific way. In some cases asset managers are not able to receive sufficient extra financial information from the investee allowing for a proper assessment. Taking into account sustainability factors may be made by way of exclusion (i.e. the asset manager checks if the investee complies with minimal extra financial criteria) rather than positive decision factors. Each asset manager shall be free to choose (i) to integrate extra financial criteria in the decision process, (ii) decide on the weighting of financial vs. extra financial criteria (ii) decide on the investment universe from which selecting investments and ultimately (iv) choose the methodology he wishes to use.
Obliging managers to integrate extra financial criteria in their strategies would mean, at the minimum, that assets considered as ‘unsustainable’ are excluded from the investment universe. This would impose additional requirements on EU managers, resulting in a loss of attractiveness and competitiveness of EU funds (notably UCITS, which are distributed globally as state-of-the-art retail investment products).

In any case, we believe that the consideration of sustainability factors should be captured in a ‘sustainability taxonomy’ to be worked out at EU level.

Regarding transparency, we believe the best policy option would be a non-legislative action, such as guidelines, focusing on how to best enhance systemic good quality disclosure (as well as avoid misleading disclosure) by asset managers to their clients regarding their policy of integration of sustainability criteria in their investment processes.
Especially with regards to reporting, experience (e.g. in microfinance) has shown that excessive investors’ requirements in terms of extra-financial reporting may dramatically increase costs for managers, investees and investors, resulting in excluding a number of potential investments and massively impacting the returns offered by the relevant funds.