19 July 2021
When a trend showcases continued value extending into the future, then the trend in question becomes a norm. Such is the case with sustainable investing, or “ESG investing”, as the term has evolved and is now used in the financial sector: The infrastructure, mechanism and consumer demands developing around it suggest that it is here to stay.
ESG is an umbrella term for a broad range of Environmental, Social and Governance factors, against which investors can assess the behaviour of the entities they are considering for investment. The Environmental aspect of ESG is a measure of a company’s impact on the natural environment. It takes into account factors including its carbon footprint, its impact on biodiversity and its production of waste and pollution. The Social aspect measures how a company treats people such as its employees, customers and the communities in which it operates, while the Governance aspect measures how a company operates in terms of audits, board diversity, internal controls and shareholder rights. These factors enable investors and other stakeholders to measure the performance and ensure the accountability of companies. Hence, one crucial aspect of ESG is that it is not simply about seeking compliance with current regulations but, rather, it focuses on the potential for a company to have a more positive impact alongside seeking to make a financial return.
ESG's rise in importance has been driven by a number of key factors. First, there has been a rise in public concern for environment and social equity. This has been reflected in an increasing desire to see that investments are ethically placed. Millennial investors, for instance, are more likely to invest in companies with social or environmental goals. Moreover, the growth of the ESG agenda has been influenced by a number of key organisations and regulator drivers, including the UN Principles for Responsible Investment (UNPRI) and the package of EU sustainable Regulations which seeks to integrate ESG considerations into the investment and advisory process in a consistent manner across sectors. Last but not least, and simply put, ESG is the driver for many people working in the sector to simply do the right thing.
Given the substantial attention paid to sustainability and its relative immaturity as an investment trend, ESG is having a fast-growing impact on the investment funds sector on a worldwide basis. At a national level, and in light of the newly enforced Sustainable Finance Disclosures Regulation (EU) 2019/2088 (SFDR OR “Disclosure Regulation”), the Cyprus Securities and Exchange Commission (CySEC) has recently reinstated in a recent announcement its commitment and focus to fostering compliance with sustainable finance standards. The Disclosure Regulation has imposed harmonised transparency and disclosure requirements on financial market participants and financial advisers and requires firms within scope to consider how sustainability risks are incorporated into the investment decision-making process and even how the remuneration of individuals is consistent with sustainability issues. As such, the SFDR is expected to affect a large proportion of the financial services industry in Cyprus. CySEC has clarified that supervised entities must ensure full compliance with SFDR disclosure obligations and with their ESG responsibilities in general and will be closely monitoring firms and take appropriate action where relevant to prevent mislabelling, misrepresenting or mis-selling in relation to sustainable finance to protect consumers and prevent them from being misled.
While ESG funds constitute a tiny part of the global stock market as we speak, the path towards sustainable finance is apparent and calls for all asset managers to become more focused on ensuring the inclusion of social and environmental considerations in decision-making processes. In the context of the fund industry, investment funds may have to consider and potentially make internal strategic changes to how they operate their business in order to align their practices with the new regulatory requirements around ESG. There is a broader opinion that soon, sustainable investing will just be called investing. One could therefore conclude that the winners will be those companies that continue to demonstrate strong leadership and dynamic strategy to make material changes to their environmental, social and governance practices.
Info: Nicole Kallasides is Legal Advisor to the Cyprus Investment Funds Association