Our small change for the big change
The case for sustainable investing can be argued from different angles. There is of course an ethics argument. Striving to treat planet earth responsibly, our fellow inhabitants with dignity, and the rules of fair business with respect – in other words, taking ESG factors into account – is for many simply a question of following their moral compass. Despite its establishment in mainstream asset management though, building its argument on a foundation of morals can leave responsible investing with the notion of being for do-gooders only. Fortunately, this perception is changing. At ALFI, the Association of the Luxembourg Fund Industry, we believe in doing good, but sustainability isn’t about altruism. There is a very solid economic case to be made. That a functioning economy needs the environment to remain fit for human habitation and stable societies living in peace seems commonplace. And many did realise early on that a social or environmental return does not have to come at the cost of a financial return. For the longest time however, aligning investments in such way that they help to combat environmental issues – first and foremost climate change – and to keep social equality at healthy levels has not been a core preoccupation for everyone in the investment business: too often did returns seem difficult to measure, both positive and negative effects more than a lifetime away. It was one of these long-term effects that eventually triggered a mind shift, and it happens to fall within the “E” category: climate change is here, and with it the painful realisation that our chances of mitigating it are rapidly diminishing. Instead, we grapple with mitigating its consequences. While it is lamentable that it took huge losses to turn from risk to reality – insurers no longer fear catastrophic weather events, they are recording them – the mind shift being followed by a money shift is a welcome evolution at least for the “E”, the green sphere which continues to dominate public perception.
Investments funds play a crucial role as fuel for the “real” economy and can have a significant influence on the direction in which our economies are developing. ALFI is convinced that asset managers as the interface between their clients’ desire to invest on the one hand and the project on the other hand have the ability to give sustainability a much needed push. Moving our savings into sustainable investments can do more for our individual carbon footprint than reducing air travel, personal car traffic, meat consumption and water use combined. Individuals who want to contribute to sustainable development are best advised to take their “small change”, even the humblest of sums, and pool it with that of others in order to achieve change on the big scale. And that is exactly what is happening. Generational changes are influencing the demand, as investors increasingly push for transparency and participation. Retail investors are not alone in this. Following COP21, institutional investors like insurers and pension funds have been readying themselves to throw their full weight behind sustainable investing, too.
The European market of responsible investing funds has almost doubled since 2010, reaching €476 bn AuM at the end of 2016. Luxembourg is the leading domicile for responsible investing funds in Europe, with a market share of roughly a third both in terms of fund numbers and AuM, a share that increases for “green”, i.e. environmentally themed funds (including those related to climate change), where Luxembourg holds 45% of European AuM. Its long-standing expertise in the area of microfinance has resulted in Luxembourg serving as the domicile of reference for microfinance funds, with a market share of more than 60% of global AuM. Two out of three European social impact funds – vehicles that put generating a social return alongside a financial return at the core of their investment strategy – are based in Luxembourg.
ALFI has been an early mover in actively promoting responsible investing opportunities for asset managers. Ever since it introduced responsible investing as the third pillar of the Luxembourg investment fund industry alongside UCITS and AIFs, the association has been advocating responsible investing and raising awareness for its many possibilities. Whether they are motivated by ethical or financial reasons (most likely a combination of both), ALFI works towards providing investors with the information and the power to direct their money towards the projects of their choice, and asset managers with the tools they need to accommodate their investors’ choices.
An important step in the right direction was made in the form of the EU Commission’s legislative proposals that followed its action plan on financing sustainable growth. A main element, the so-called taxonomy, is designed to establish a classification system for sustainable economic activities. Definitions are indeed needed, but the outcome should not be overly prescriptive. The aim is to facilitate sustainable investments. A broader approach that allows for different “shades of green” could be better suited to support the transition towards a more sustainable economy. Another element concerns disclosure and aims at the harmonisation of transparency rules. Standardised disclosure is key in order to produce reliable, comparable and accurate data. From an asset management perspective, the focus on the field of environmentally responsible investing is a good start – transparency with regard to social and good governance factors should follow.
In the domain of retail investors, labelling can be one useful approach. It is an important tool to avoid greenwashing, but it only works if labels are meaningful. Labelled products have to do exactly what they promise, and first-class quality control is essential. Regard to responsibility factors must not become a tick-the-box exercise. In the Grand-Duchy, the Luxembourg Finance Labelling Agency (LuxFLAG) has been awarding recognisable labels to eligible investment funds since 2006.
For ALFI, responsible investing is more than a set of principles to comply with. It is truly a matter of utmost importance, and we are pleased to see that more and more industry players share this conviction. Through investment funds, everyone’s small change can achieve a big change.
ALFI, Association of the Luxembourg Fund Industry
Camille Thommes is the Director General of ALFI, the Association of the Luxembourg Fund Industry. He joined the association back in 2007.
Before ALFI, Camille Thommes was in in charge of the Investment Fund Department at the State and Savings Bank, Luxembourg (BCEE) from 2001-2006, after holding various senior positions in the Securities & Custody department since 1993. He started his professional career in 1986 at Banque Générale du Luxembourg (now BGL-BNP Paribas) where he held positions in the Securities and Custody Division.