In its response to the public consultation, Finance Watch has highlighted that a definition of institutional investors and asset managers’ legal duties, encompassing explicitly the consideration of sustainability factors is needed at the EU level. Finance Watch has also explained that making private financial institutions contribute to the transition to sustainable economies should be part of a more ambitious sustainable finance agenda.
Finance Watch believes there is no a conflict between institutional investors and asset managers’ legal duty of pursuing the best interest of the beneficiaries and the consideration of sustainability factors. ESG can have a positive or negative impact on the returns on investments. Therefore, their integration in investment decisions should be considered as fully consistent with the return maximization and risk minimization objectives and this interpretation needs to be fully embedded in the EU legal framework.
Moreover, the best interest needs not be cast purely in financial terms. ESG factors can have a positive impact on the wellbeing of beneficiaries and this is not reflected in the standard risk-return models. For this to happen, the involvement of beneficiaries should be strengthened with regard to the sustainability factors and their expectations with regard to sustainability need to be explicitly part of the asset management mandates.
Finally, the consideration of sustainability factors would contribute to addressing market failures caused by negative externalities and so redirecting capital allocations towards more sustainable economic activities which ultimately will improve the general welfare.
In its response, Finance Watch has also highlighted that climate change should be systematically considered in the investment decisions given its risk nature. In particular the asset managers and institutional investors should implement TCFD recommendations – in the area of governance, strategy, risk (including exposure to litigation) management, metrics and targets – and align the portfolios with the 2°C scenario.
Finally, minimum sustainability standards for asset managers and institutional investors should be developed at the EU level.