The emergence and rise of InvestTech across the asset management space has also led investment managers to seek innovative solutions to improving customer engagement amid major shifts in investor demographics, including the movement of wealth from retiring baby boomers to millennials. This rise of this investor class coincides with another booming trend: ESG investing. In fact, several firms and PMs have already dubbed 2020 The Year of Sustainable Investing.
Millennials now hold one-sixth of the wealth and as a whole are actively seeking alternative investments that focus on social impact. In fact, surveys from Morgan Stanley, Fidelity and Nuveen Asset Management found that 95% of affluent millennial investors want to take the environment/climate issues into account with their investments, while 77% have already put money towards impact investing and were also eager to invest in tech and innovations that fundamentally transform investing at its core. Nuveen even reported that 92% of high net worth millennials ranged from “somewhat” to “very likely” in probability of putting their entire allocation into “responsible investing.”
Forbes outlines the advantages of digital brokerage accounts from platforms like Robinhood or eToro that have a large millennial following due to their utilization of technology, which offers increased investor control and accessibility via their respective applications. Micro-investment platforms have also gained popularity by allowing investors to save and invest money in small amounts. Now, traditional asset managers have begun broadening their product range in order to compete with the rise of these types of platforms.
In August 2019, the Business Roundtable redefined the purpose of a corporation to focus its efforts on benefiting all stakeholders, rather than just shareholders. Though the terms differ by only two-characters, this statement, signed by 181 CEOs, represents the push for companies, organizations and individuals to acknowledge and better account for environmental, social and governance (ESG) factors.
According to a Natixis ESG investing survey published in May 2019, six out of 10 institutional investors incorporate ESG factors into their decisions and analysis. Roughly 60% of these investors implement ESG investment strategies in order to align investor values with that of their investments, and 38% employ ESG investment strategies to minimize headline risks, and 20% do so to help generate higher risk-adjusted returns.
In order to adapt to heightened investor interest in sustainable funds, the number of ESG mutual funds and ETFs grew about 50% in the past year to 351, from the world’s largest asset managers, including Vanguard Group, Nuveen and BlackRock Inc. all launching new funds.
A growing number of investors have also disclosed that they employ ESG investment strategies because of the long-term value of an ESG investment. ESG investing has the potential to both improve performance and achieve an investor’s financial goals, said Natixis, proving that ESG investing can align assets with personal values to generate alpha.
Morgan Stanley reiterates this perspective in the report A Yield-Focused ESG Approach, stating that companies with a strong ESG profile are less prone to environmental, social and governance related issues, fines and possible litigation. By following available ESG guidelines and techniques, companies can proactively mitigate outstanding issues.
Regulation was the paramount point of discussion surrounding the ESG sector throughout 2019. Despite $12tn sustainable investing assets under management, ESG guidelines remain in flux. Considering that 65% of institutional investors believe that ESG investing will become an industry standard within the next five years, it’s evident that now more than ever ESG requires set standardization.
Investments in European and US ESG-oriented funds increased 44% between the end of 2014 and the end of 2018, reaching a total of EUR 761bn. Yet, until 2019, the ESG sector existed with little regulation, measurements and even a standardized definition. However, with growing influence of external pressures—including investor concerns, social objectives, FinTech development and economic and political imperatives—the international regulatory landscape of the ESG sector has been experiencing a significant shift in its foundational principles.
Courts have enforced certain protections for ESG investors, for example applying Securities Fraud Laws, or through regulatory action through the FTC Section 5, which relates to unfair or deceptive practices. Using 10b-5, the SEC and investors may seek damages from an issuer of Green Bonds for making false statements related to ESG initiatives if those comments are deemed a material factor influencing an investment decision. Under FTC Section 5, if a company makes a false statement about an environmental or sustainable practice, the FTC can levy a civil penalty against that company.
While the SEC has rejected imposing market-wide ESG regulation and disclosure standards, it does call for the release of specific ESG line item requirements and anti-fraud rules. Still, in July 2019, SEC Chair Jay Clayton stated his hesitancy to have the SEC require rigid standards or metrics for ESG disclosure. While the lack of required disclosures has arguably resulted in ‘greenwashing’ and cherry-picking of ESG information, most international companies believe it is in their best interest to disclose ESG reporting due to lobbying organizations, such as SASB and peer pressure.
Within the US, SASB has been a major force under FASB aiming to ensure that relevant social and environmental measures are accounted for within general accounting principles. Failing to disclose ESG information can end up causing more harm than good, as was demonstrated through Legal and General Investment Management’s removal of Exxon Mobile from its $6.2bn Future Worlds Fund because it did not meet the ESG fund’s minimum disclosure requirements.
Recently, the European Union has taken the lead on implementing ESG regulations. This past June, the European Commission released a Sustainable Finance Taxonomy, which includes technical screening criteria of 67 activities across 8 sectors, methodologies for evaluating an activity’s impact on climate change and general guidance and case studies for investors. The EU has already begun implementing the first phase of the Shareholder Rights Directive II, with the second and final phase to begin in September 2020. This directive focuses on improving corporate governance of companies whose securities trade on EU regulated markets, with a specific focus on ameliorating shareholder rights and engagement.
Though these initiatives only currently apply to the European Union, it is only a matter of time before they ripple out and begin to influence the regulations of several nations, including the US. Companies and asset managers alike are increasingly accounting for and disclosing ESG information in order to demonstrate to investors that they are progressively improving their observance of ESG factors and better managing risks and opportunities.
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John Mizzi, our VP of Marketing, appeared on Appetite for Disruption: The Business and Regulation of FinTech!
In our latest blog, IMTC's Legal Counsel breaks down the status of three ongoing regulatory issues: the SEC's Regulation Best Interest, the California Consumer Privacy Act and the OCC FinTech Banking Charter.