My son is graduating in Madrid next month and is busy reading for the final exams. No distractions for him, as the Spanish capital hit 40 degrees this week and people simply must stay indoors. The temperature across Europe was 15 degrees higher than it should be last weekend, emphasizing what we have in front of us. To slow global warming, we need to act, and this is not a matter of regulation vs. the industry. We need to act as one to hand over the planet to coming generations to ensure they can build a prosperous future.
In an article last week, it was argued that the ESG-framework has fallen prey to greenwashing asset managers. Questions posed about the relevance of ESG (Environmental, Social & Governance) are outright unacceptable. If market participants are caught mis-selling, they need to change. Regardless if the reason is unrealistic promises about returns or false ESG ambitions. If you think back it is not the first time regulators are looking into how new regulation is being applied. And often they start at the top of the industry in each country to make a point. It was like this when the industry introduced active share as an indicator of active asset management more than 10 years ago and it will happen again this decade. Trust me. But folding ESG now is not an option, just because it gets difficult. Even though the framework might not be perfect, it's a one in a lifetime opportunity to make our industry truly relevant going forward.
Engagement
The issue here at stake is accountability and we need to be as transparent about ESG ambitions as possible. At APG, our responsibility toward the ultimate pensioners is a good pension (read good returns) yet also on a planet to spend it (read ESG in a broad sense). We consequently deliberately invest under a multi-objective -without pre-set order - of return, sustainability, cost and risk. Article 8 of the Sustainable Finance Disclosure Regulation (SFDR) fits this quadrant of objectives, as the dynamics between our objectives are interdependent and of different importance - case by case, investment by investment. Within this approach we often identify companies that with engagement are expected to execute meaningful change or impact to make the planet better for people and everyone else - hence why biodiversity is increasingly on the agenda as an important part of sustainability.
Where companies might feel tempted to falsely brag about ESG investing it should surely be exposed and corrected. It is however also a fact that the regulation is new and parts of the more detailed instructions on how to report is late and pending. Regulators should acknowledge this fact and work together with the industry to bring us all forward and allow some slippage or at least benefit of the doubt. The core issue with this kind of regulation is that it might actually not lead to a better world. At APG we have, together with other investors, created a system under which investors can translate Sustainable Development Goals (SDG) to actual investments (SDI). We believe the system is solid, transparent, and making it possible to report consistently, set targets and compare. But will it make the world a better place? Probably and we surely hope so. But can we guarantee it? Absolutely not. If you think back to the example of active management, it is again surprisingly similar. No active asset manager can guarantee outperformance. Likewise, no ESG manager can promise that the world will be better, greener, more equal, or less warm. But we are surely all working towards that as a strong ambition.