We want to be leaders in the ESG space and we want to do this with integrity.
Julian Ide, CEO of Martin Currie
& Head of EMEA Distribution, Franklin Templeton
(Martin Currie is a specialist investment manager of Franklin Templeton, who wrote this article)
Investors will see important changes in the way their asset managers provide sustainability-related information on their products and updated sustainability policies. This is the result of requirements emanating from the European Union’s (EU) Sustainable Finance Disclosure Regulation (SFDR) which are broad in scope, impacting not only asset managers but also other financial market participants including the likes of insurers, pension providers, as well as qualifying venture capital and social entrepreneurship managers.
The Regulation is about more transparency and authenticity for our clients—eliminating examples of ‘greenwashing’ or those products where sustainability is not truly embedded into processes.
We believe the implementation of SFDR will be a game changer and will have a fundamental impact across the financial services industry. The EU’s action plan will enable asset managers to become more connected with our clients in our shared commitment to invest and allocate capital sustainably, to achieve better outcomes for all.
What are the implications?
In recent years, the demand for environmental, social and corporate governance (ESG) products from investors has grown quite rapidly with no signs of slowing down. Investors increasingly want products that better reflect their values and beliefs, and therefore have a positive impact on our world, while also delivering sustainable financial returns.
However, the significant growth in investor demand and subsequent response from asset managers has created a crowded environment, which makes it harder for investors to assess ESG credentials of funds and the asset managers who create those products.
Are you ready for the EU SFDR?
Topics of the discussion include:
- Impacts on the European distribution landscape
- Implications for investors
- What clients are expecting from asset managers
Why do we have this Regulation?
The Regulation is part of a much larger framework, which is the EU’s action plan on financing sustainable growth1, originally adopted in 2018 and has an overall aim to connect finance with sustainability. The action plan, in turn is the response to two important global developments: first, the United Nations’ 2030 Agenda for Sustainable Development, which set out the Sustainable Development Goals and second, to fulfil the EU’s commitment to the United Nations Framework Convention on Climate Change, better known as the Paris Agreement.
How does the Regulation fit into the overall action plan on sustainable finance?
The action plan has three clear objectives, 1) to reorient capital flows towards a more sustainable economy, 2) to mainstream sustainability into risk management, and 3) to foster transparency and long-termism
- First set of disclosure required by 10 March 2021.
- Firm level disclosures are required to describe our sustainability approach.
- All products to be categorised as article 6, 8 or 9.
Integrate sustainability risks into advice or portfolio management investment decisions.
Products which actively promote environmental or social characteristics.
Products which have sustainable investment as their objective.
We see value in all three categories of disclosures to allow us to serve different client objectives.
What does this mean for the European distribution landscape?
Any flexible ESG integration approaches are off the table. Analysing sustainability risks as part of the overall risk management framework is integral to building portfolios which deliver long-term sustainable financial returns. Reporting will be required across the three article categories.
According to a study by PricewaterhouseCoopers (PwC), 77% of institutional investors will stop purchasing non-ESG products within the next 24 months2 and by 2025, €7.6 trillion will be invested in ESG products—that is an increase from 15% today to 57% market share of European assets.3 In our view, whilst the speed of transition will depend on several factors, including public and political pressure and further regulation, the direction of travel is clear to see.
This means that the industry will not be able to simply highlight in their material that a product is sustainable, they need to show that this has been considered at the outset.
Providers will need to disclose information at a firm-level, their sustainability policies and additionally, they will also be required to disclose information on a product-level about their financial products. In both cases, the consideration of principal adverse impacts (PAI) of investment decisions on sustainability factors need to be disclosed.
In addition to the regulatory push, the global pandemic COVID-19 has been a contributing factor towards catapulting and accelerating the world further toward sustainable investing. Both institutional and retail investor interest in ESG continues to grow apace and has arguably accelerated dramatically as a direct result of the ongoing COVID-19 crisis. With competition for investor capital expected to ramp up, managers cannot afford to ignore client demands for greater transparency around how they take ESG factors into account.
At Franklin Templeton, we’ve been meeting the majority of these requirements for many years by placing emphasis on transparency and authenticity. We believe that over time, the European distribution landscape will shift decisively towards sustainability-oriented products as standard.
We want to be leaders in the ESG space, and we want to do this with integrity. We don’t want to just comply with the new Regulation—we are holding our investment teams to a higher level because we believe in it and remain fully committed.
This will also be reinforced by the amendments to the MiFID II delegated act, which is currently in draft, but has stated that clients indicating sustainability preferences should be offered ‘sustainable investment’ products, which would mean article 8 or article 9 products.
Having integrated ESG into our investment approach for over a decade we welcome this development.
What does this mean for investors?
The real economy is shifting, and consumers are looking for more sustainable choices. Take the energy sector as an example where renewable energy previously was not available. Now ‘green energy’ has become an option that is widely acceptable with providers— energy that has been produced in a sustainable and environmentally friendly manner.
A research study by Franklin Templeton in the United Kingdom revealed how strongly younger workplace pensions savers feel about ‘responsible investment’. Up to 78% feel their current pension provision does not align with their values, or do not know if it does. Importantly, 45% of respondents would be motivated to increase their contributions if their pension incorporated responsible investment values.4
Investors want their provider to become more motivated in telling investors how they are integrating ESG factors into their business strategies and identifying new products which puts sustainability at the top of their requirements.
With the advent of increased sustainability-related disclosures being made available in the public domain, which should be published on websites, this should provide investors with verifiable requirements for sustainability claims.
Our commitment to ESG
With the recent integration of several specialist investment managers into the Franklin Templeton family, we are very fortunate to be able to offer a diversity of ESG approaches from Brandywine Global, ClearBridge Investments and Martin Currie. Each of these managers have full autonomy over their investment processes and offer their own unique approach to responding to the disclosure requirements of the Regulation.
Franklin Templeton is focused on meeting the primary legislations (Level 1 requirements), which has meant a great deal of work and collaboration behind the scenes. Importantly, the work will not end in March 2021. In accordance with Franklin Templeton’s strong commitment to ESG and sustainability, we will continue to review our investing solutions to transition more and more of our products to become more sustainability-oriented.
As a global investment manager with a rich history of over 70 years as a fiduciary, Franklin Templeton is committed to supporting and strengthening the consideration of ESG opportunities and risks across our entire platform.
The Regulation will be a game changer and will transform the playing field for the financial industry enabling more transparency and authenticity for our clients and will give more sustainable investment choices for investors. At Franklin Templeton, we don’t want to just comply with the Regulation; we want to be leaders and do this with integrity.
We recognise there is still much to be done. The work required to be fully aligned to the EU’s ambitions demands a multi-year effort. We will continue to evolve in this direction, because we believe this is what our clients deserve.
Regulatory information and risk warnings
Past performance is not a guide to future returns
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The analysis of Environmental, Social and Governance (ESG) factors form an important part of the investment process and helps inform investment decisions. The strategy does not necessarily target particular sustainability outcomes.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
The views expressed are opinions of the named manager as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
The information contained has been complied with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this recording for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
For wholesale investors in Australia: This information is issued and approved by Martin Currie Investment Management Limited ('MCIM'). It does not constitute investment advice. Any distribution of this material in Australia is by Martin Currie Australia Limited ('MCA'). Martin Currie Australia is a division of Legg Mason Asset Management Australia Limited (ABN 76 004 835 849). Legg Mason Asset Management Australia Limited holds an Australian Financial Services Licence (AFSL No. AFSL240827) issued pursuant to the Corporations Act 2001.
For institutional investors in the USA: The information contained within this presentation is for Institutional Investors only who meet the definition of Accredited Investor as defined in Rule 501 of the United States Securities Act of 1933, as amended (‘The 1933 Act’) and the definition of Qualified Purchasers as defined in section 2 (a) (51) (A) of the United States Investment Company Act of 1940, as amended (‘the 1940 Act’). It is not for intended for use by members of the general public.