A new EU regulation came into effect on March 10th which requires all Irish financial advisers to consider “sustainable investing”
The Sustainable Finance Disclosure Regulation (“SFDR”) effective on the 10th of March 2021 was introduced by the European Commission alongside (the “Taxonomy Regulation”) and (the “Low Carbon and Positive Impacts Benchmarks Regulation”) as part of a package of legislative measures arising from the European Commission’s Action Plan on Sustainable Finance.
The SFDR sets out harmonised rules on transparency and aims to include environmental, social and governance (ESG) “sustainability” considerations and risks in the decision-making process of investors and asset managers in a consistent manner across the EU financial services sector. A sustainable investment product is where a product is sold as promoting environmental or social characteristics. It is envisaged that greater transparency and sustainability-related information will enable investors to compare financial products and to make informed investment decisions about ESG products.
A key focus of the European Commission Action plan is Sustainable Finance and recital 19 of the regulation state;
“The consideration of sustainability factors in the investment decision-making and advisory processes can realise benefits beyond financial markets. It can increase the resilience of the real economy and the stability of the financial system. In so doing, it can ultimately impact on the risk-return of financial products.”
You may not know this but Ray McNicholas who founded our other business Ethical Financial was instrumental in bringing the very first “green” fund into Ireland in 1997 when he personally managed to get Friends First to launch the UK Stewardship fund in Ireland.
The following graphic illustrates the range of possible financial goals overlaid with an increasing desire to achieve social and or environmental positive impact.
Doesn’t this mean I will make less money?
It’s a common concern among investors that either the investment will cost more or that the underlying investment strategy won’t perform as well as an agnostic portfolio.
If we compare the Vanguard ESG World Equity Fund with the MSCI World Index over the last 7 years, we see that the ESG Fund has indeed under performed the market by 0.71%pa.
But this is true of any fund. If we compare the Vanguard ESG Fund with the agnostic Vanguard Global Stock index fund over the same period we see the investing in an Environmental, Social and Governance Screened fund has actually been a good decision, at least over the last 7 years.
Furthermore, its also been possible to invest in more specialist funds and achieve a better risk adjusted return than the market index by, for example, investing in Emerging Markets funds.
From this we can conclude that, at least on average, investors would not have been worse off from pursuing a socially responsible investment strategy over the last 7 years.
For educational and information purposes only.