Sustainable Value for Money: How to reconnect finance with the needs of society
A few weeks ago, the new European Commission, led by Ursula von der Leyen, rolled out its first package of measures, called the European Green Deal. This ambitious plan aims to make the EU climate neutral by 2050. A series of legislative proposals are expected to follow in 2020 in the context of this plan.
The European Green Deal follows the Action Plan on Sustainable Finance, initiated by the Juncker Commission in early 2018, which included a legislative proposal for a sustainable taxonomy. The final text was approved by co-legislators in December 2019 and is expected to be enshrined in law in the coming weeks.
CFA Institute agrees that the financial sector has the power to make investments more sustainable and climate friendly, but this goal must not undermine the value for money invested by individual investors. Sustainability not only relates to environmental, social, and governance (ESG) investing but also achieves sustainable returns for investors and supports a sustainable industry. Along with BETTER FINANCE, the European Federation of Investors and Financial Services Users, CFA Institute published the report “Sustainable Value for Money.” The report was based on two surveys and an in-depth roundtable discussion that CFA Institute and BETTER FINANCE conducted of their respective members. We asked our members a series of questions to better understand how finance professionals and retail investors believe more sustainable value from investments can be attained.
The first takeaway of the survey is the (nearly) complete alignment of responses given by members of CFA Institute and BETTER FINANCE. This result highlights that both retail investors and finance professionals hold similar views on sustainable value for money.
Members of both CFA Institute and BETTER FINANCE have called for a mandatory duty of care that investment managers and advisers must comply with to ensure that they act in the best interest of investors. This duty of care could take a similar form as the Hippocratic Oath that medical professionals owe to their patients.
Survey respondents also agree on the need to have more information about the products in which they are willing to invest. Currently, data are too confusing and misleading for investors to make accurate investment decisions. In addition, important information, such as past performance, is not provided. Members of CFA Institute and BETTER FINANCE both said that disclosure of actual costs and past performance should be provided for all retail investment products.
Currently, such information is not mandated by the Packaged Retail Investment and Insurance Products (PRIIPs) Regulation: the Key Information Documents (KIDs) that must be made available for investors lack the disclosure of past performance for this type of financial products. The European Securities and Markets Authority recently launched a public consultation, which CFA Institute has responded to, about a review of the PRIIPs Regulation. The consultation aims to understand the main issues on the current KID format and to gather views on how to improve transparency for PRIIPs products.
Because financial products and advice are intangible, investors can rely only on the information provided by investment professionals to make an investment decision. Such information must be accurate, complete, and not misleading. Enhancing transparency and placing the clients’ interests above the employer’s and the professional’s interests are the only ways to restore investor trust.
Survey respondents also called for more action on corporate governance and shareholder activism. Investor rights and objectives are not always aligned with those of companies and large investors, who take a short-term approach. The Shareholder Rights Directive should be reviewed to improve how shareholders can exercise their rights. CFA Institute advocates for the introduction of measures enhancing minority shareholder representation in company boards but does not support the practice of dual-class shares holdings, which deviates from the principle of “one share, one vote.”
Regarding ESG investing and sustainable finance, the report underlines that investment managers should disclose how they consider ESG factors in the investment decision-making process. Members of both BETTER FINANCE and CFA Institute have a split opinion on whether such a disclosure should be mandatory or voluntary. During the joint BETTER FINANCE and CFA Institute conference, held in Brussels on 20 November 2019, Jeroen Bos, CFA, head of specialized equities and responsible investing at NN Investment Partners, stressed that, today, ignoring material ESG and sustainability aspects would be considered a violation of fiduciary duty. In the past, taking into account such factors would have been seen as a practice that could hurt performance (and therefore not in compliance with fiduciary duty).
Other speakers at this event agreed on the need to do more when it comes to the challenge of greenwashing. Henrik Husman, president, Nasdaq Helsinki, remarked that greenwashing must be minimized to avoid further trust decline. Nasdaq has decided to use third-party agencies on a regular basis (not only for the listing process) to verify that funds raised through green bonds actually are used for green purposes. It is nearly impossible, however, to fully eliminate situations in which products are marketed as sustainable, but proceeds are used for other goals. Gary Baker, managing director, EMEA, CFA Institute, agreed that some greenwashing cases are inevitable. The major issue is the absence of clarity in the characteristics of products that are sold to investors and in what activities these funds will be used. This situation could cause a crisis of trust. Furthermore, the industry must provide more transparency regarding costs and performance of products that are marketed.
The debate surrounding sustainable value for money is expected to remain high on the EU policymakers’ agenda for the next five years. To achieve what is necessary, the financial services industry must change its approach and processes to allow for a transition toward a more sustainable economy. Retail investors, however, need more protection and a clear explanation of costs and charges before investing in sustainable products.
Image Credit: ©Supoj Buranaprapapong