The sustainable finance sector has faced a whirlwind over the past two years. From greenwashing scandals and SFDR downgrades to unreliable ESG data and politicised debates in the US, the landscape is ever-evolving. Topping it off, a recent Morningstar report noted that investments in climate funds have yet to make significant strides in limiting global warming to the Paris Agreement's 1.5 degrees Celsius target. And after the SEC imposed a $19 million fine on DWS, regulators globally are now setting their sights on greenwashing.
Luxembourg, a stalwart in sustainable investments, is not insulated from these tremors. By the end of 2022, over half of all European SFDR Article 9 funds and a third of Article 8 funds were domiciled there. As PwC data indicates, a staggering two-thirds of European ESG assets, amounting to €5.2 trillion, have their home in the Grand Duchy.
This turbulence is palpable throughout the investment world, from Europe to the US. Regulatory clarity is dissipating, and the path forward, particularly with the upcoming US presidential elections, remains foggy. For many in the industry, the immediate task is damage control.
Ditching ESG and sustainable
As the dynamics shift, so does the terminology in sustainable finance. Under pressure from the SEC, US fund managers are shedding the 'sustainable' label from several funds. The term ESG also faces scrutiny. “It is about time we retire the term ‘ESG’ and use clear, specific language in terms of risk management and value creation,” DWS whistleblower Desiree Fixler recently commented.
BlackRock's CEO, Larry Fink, has also expressed reservations about ESG, citing its “weaponization” by certain right-wing Republican factions.
Interestingly, while many investment professionals have reservations about ESG, they acknowledge the importance of integrating non-financial metrics. A Bloomberg survey revealed that 67 percent of firms might be distancing from the ESG terminology, but they're still practising its principles. For 59 percent, the ESG label seems to be more off-putting than helpful to clients.
On this side of the pond, the European Union, now termed the “Silicon Valley of Regulation”, is bolstering the adoption of sustainable finance through legislative measures like the SFDR. However, the SFDR's classification system is under scrutiny for its ambiguities. The EU's recent review on the SFDR underscore its openness to revamp and beckon the industry for suggestions. “To ensure these regulatory packages succeed, they should fulfil their ultimate mission: foster the transition of our economies... Sustainable finance is constantly evolving as the market changes, new data surges and science develops further,” Nicoletta Centofanti, general manager at the Luxembourg Sustainable Finance Institute (LSFI), remarked.
Luxembourg primed to lead
The task of overhauling the SFDR lies with the upcoming EU Commission, post the spring elections. We may not see a SFDR 2.0 before 2025, with its implementation likely in 2026 or later.
Along with such prolonged uncertainties, a new generation of investors is emerging, keen on amplifying their impact on the world around them. The present sustainable finance scenario might not be the ideal for many, but it holds promise.
Despite the ongoing storm, there's potential for transformation and clarity. With Luxembourg at the epicentre of sustainable investments, it's primed to lead this change.
Through strategic collaborations, understanding the aspirations of the future generation, and a proactive stance, the financial realm can rise anew – more transparent and truly echoing sustainability. After all, genuine sustainability transcends mere labels and zeroes in on creating a lasting positive imprint on our world.
Financial journalist Raymond Frenken is Managing Editor of InvestmentOfficer.lu. He has followed international financial markets and EU financial regulation for more than two decades. In Flux is a regular column on Investment Officer Luxembourg shedding light on the Luxembourg financial ecosystem.
