Most importantly, different products will have different objectives. If a client prefers a decarbonizing investment, the objective could be related to the carbon emissions of the investee companies, and the client could expect the carbon footprint of the investment to reduce over a period of time.
Concerns from the market
Unsurprisingly, there are concerns that higher SI values will drive flows. With no clear and comparable way of building a sustainable investment, this can become a misused tool. In the above example, if instead of getting an SI that measures the rate of decarbonization, the clients get a generic metric showing the quantity or quality of an ESG rating or score, then whilst that score or rating may consider carbon, it would likely not be the overriding metric corresponding to the fund’s objective.
Worse still, some bad practices are starting to emerge where:
- The objective is not specific to the product but based on a generic set of ESG data
- The provider doesn’t disclose how the investment is doing no harm based on PAI indicators, but uses some other data set as a proxy to harm
- The provider defines good governance by a lack of social controversies
Firms are eagerly anticipating more guidance from the European Commission and the ESAs recently posed a set of questions to the Commission (link) seeking clarifications on some of these concerns. In the interim, it is important to understand the baseline of information to disclose, and watch out for generic sustainable investment offerings.