The Summer of Sustainable Investing | markets

On August 2, a regulatory change came into force that will help promote many more investments according to sustainability criteria. Under an evolution of the European regulation on financial products, known as Green Mifid II, banks and financial advisers have the obligation to ask their clients if they wish their investment funds to take into account environmental criteria. , social and good corporate governance (ESG). In other words, if when choosing the companies they have in their portfolio, they will consider, in addition to revenue, debt or cash flow measures, also issues such as carbon footprint, representation of women in their governing bodies or its commitment to end forced labor at one of its suppliers.

Rebeca Minguella, CEO and founder of Clarity AI – a company dedicated to collecting all kinds of ESG information and then offering it through a platform – believes this is an important step to help grow investments according to sustainable criteria. “So far those who have been most involved have been corporations and large investors, but this will make more people realize that they can make a positive impact with their investments.”
Once the client responds that he wants his funds to have a sustainable approach, the advisor or the bank has an obligation to offer him products that have this ESG profile.

For a product to be eligible, it must meet several characteristics. It must have a minimum percentage of investments linked to the European Green Taxonomy, a minimum according to the European Union’s Sustainable Financial Disclosure Regulation or a minimum of investments taking into account the main adverse events (PIAS). The latter refers to the consequences arising from investment decisions. PIAS indicators measure the negative impact of economic activities on sustainability factors.

If a product does not meet any of these three criteria, it cannot be offered to the customer. In these cases, the rule establishes that the individual will have to modify his durable preferences. The entity will have to document it, explain the change in profile and it will also be followed up.

Although it is still too early to measure the depth of the so-called Green Mifid II, the sector is convinced that it will lead to a very significant increase in the hiring of socially responsible investment funds, an area in which the Spain was very late. other countries.

Until now, the two flagship formats of ESG investment were so-called article 8 funds and article 9 funds. The first are investment funds that generically take into account these extra-financial criteria, such as the fight against climate change or the United States. Nations Sustainable Development Goals. Article 9 funds, considered the true black-legged sustainable funds, are those that pursue a specific environmental or social objective, and measure the impact that their investments have on its achievement.

In general, all persons who, during the next suitability tests, answer that they wish to keep ESG criteria in mind when investing, will be referred to these two types of Article 8 and Article 8 funds. 9.

Modifying Mifid II requires including additional questions about the customer’s sustainability preferences, but also asking the customer how much they want to include sustainable products in their portfolio and recommending or purchasing products that respond to preferences.

To prepare for this new regulation, banks had to train thousands of employees so that they would be able to advise their clients on sustainable investment issues. CaixaBank has implemented a 75,000 hour plan which affects a group of more than 30,000 employees. Banco Sabadell has also activated courses on the internal platform on Green Mifid, among the usual ones that are used to recertify Mifid. The same goes for Banco Santander, as well as BBVA and Bankinter, which have been training since the start of the year on sustainable finance.

These new questions about socially responsible investing will not only affect new clients. Advisors are required to periodically update the suitability tests they perform on their clients when defining their investment portfolio. In some cases it is once a year. Or every two years. But when they come back to ask them about their economic situation or their financial preferences, they will already have to integrate the question of sustainable investment.

In the case of automated advisory firm Indexa Capital, the question they ask their clients is “Do you want to incorporate a socially responsible investment bias into your portfolio?” According to the firm’s CEO, Unai Ansejo, 16% of new clients surveyed decide to bet on portfolios with an ESG profile. In the case of old clients, only 4% is transferred to sustainable funds.

To serve those who wish to pursue this socially responsible approach, the company has designed 10 portfolios (depending on the higher or lower level of risk) that invest in ESG index funds. For example, in the global stock market, they have the Vanguard ESG Developed World and the Vanguard ESG Emerging Markets. For the most conservative portfolios, they opted for the Amundi Index JP Morgan Global Government Bonds fund and for corporate debt, the iShares ESG Screened Global Corporate Bond, from BlackRock.

On average, the costs of socially responsible investment (SRI) funds are 0.08 percentage points higher than the normal funds that Indexa uses for the rest of its portfolios. This is due to the fact that index construction companies carry out a detailed analysis in terms of sustainability, governance and corporate social responsibility of the market before constructing the SRI index, incurring higher expenses than traditional indices. This also influences the fact that SRI funds are, for now, smaller, which means sharing the expenses among fewer people.

Regarding profitability, Pablo Porres, Director of Investments and Savings at ING, explains that “there are still no conclusive studies that indicate that you have to sacrifice returns to invest with sustainable criteria” . In 2022 alone, the greenest funds suffered as they had a larger share of technology companies in their portfolios and renewable energy, two industries that have seen larger declines this year than the market average. “But in previous years, these were sectors that worked very well,” he adds. In any case, it seems clear that in the long term everyone involved in investment will move towards industries that pollute less and are more committed to the planet.

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