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The E.U. Influence on Sustainable Investing in the U.S.

When it comes to the capital markets, the U.S. markets are the world’s largest and “among the deepest, most liquid and most efficient.”[1] Healthy, transparent markets are critical to ensure that capital flows to support innovation and job creation, which drive a robust economy and underpin individual wealth creation.

However, the U.S. has been slow, diplomatically speaking, to create the conditions to ensure that the markets orient capital towards the most important environmental and social challenges of our time. In contrast, the E.U. is moving at a much faster speed.

In a recent episode of TheIMPACT TV, Michelle Friedman, Executive Director (ESG/SRI strategist) of MSCI, refers to the E.U.’s Sustainable Finance Disclosure Regulation (SFDR) as the “most ambitious plan we’ve seen in terms of ESG regulation.”[2] SFDR is intended to shift capital towards sustainable opportunities, while mitigating greenwashing at the product and entity levels.  According to SFDR, the volume of transparent sustainability data funds will increase, thereby influencing funds and fund families beyond the E.U.’s jurisdiction, while fund families will likely not want to create two levels of disclosure based on geography. We may even see multinationals broadly disclosing according to E.U. guidelines to avoid the onerousness of operating at multiple standards.

In addition, financial advisors in the E.U. will be required to ask their clients about their specific sustainability interests as part of determining suitability for investments. While the SEC and other U.S. regulators are getting better educated on ESG, many advisors remain behind the curve on offering sustainable investing to their clients, despite growing client interest.[3] In fact, research institution Cerulli found that advisors “limit ESG investing to their high-net-worth clients…with more than $5 million in investable assets, leaving out the 56% of households with investable assets between $100,000 and $250,000 who said they would rather invest in companies that have a positive social or economic impact.”[3]

In the E.U., on the other hand, “ESG really seems to be on track for becoming business as usual” according to Friedman.[2]

The G7 Supports TCFD

The Task Force on Climate-related Financial Disclosures (TCFD), which only released its recommendations in 2017, has fast gained support from financial services firms and governments. At last week’s G7 meetings in the U.K., finance ministers stated their support for mandatory climate disclosures, using the TCFD framework. This is another signal, ahead of COP26 in November, that climate risk is moving up the geopolitical agenda. Whether disclosure leads to far-reaching changes commensurate with the problem remains a big question, however a globally aligned understanding of the issues should support better international and domestic policy and drive more capital towards solutions and adaptation.