ESG in Finance: A Trend, not a Fad

How do Italy's top asset managers see Environmental, Social and Governance (ESG) issues? What are the latest trends and developments? Andrea Beltratti, Full Professor at Department of Finance, and Alessia Bezzecchi, Associate Professor of Practice Corporate Finance & Real Estate at SDA Bocconi, found out when they interviewed around 40 asset managers in Italy for their book "ESG – Investing, Tecnologia e il Nuovo Paradigma della Centralità del Cliente" (Egea).

The survey found growing evidence that asset managers are using ESG not only to produce products that are compliant (like excluding tobacco stocks), but also showed an increasing interest in using ESG to select all of the companies in their entire portfolio. When asset managers select their portfolios, they use ESG as a criterion.

"Climate change is a good example, it is a relevant factor, and it is affecting companies more and more across all sectors," he said. "Simply adding a few products that are climate change-compliant doesn't really help. You need to show you have done your homework. Asset managers need to think horizontally about the impact of climate change and ESG and sustainability for all the companies you put in your portfolio regardless of whether they are in an ESG portfolio or not."

The survey included interviews with CEOs at both Italian and foreign asset management companies, who said across the board that the regulatory efforts by the European Commission are useful and could provide a competitive advantage compared to other areas of the world.

"As the interest of ESG investing is growing throughout the world, having European asset managers at the forefront of the procedures and investment processes could be potentially very important competitive advantage," he said. "To me that was interesting where you see regulators and private players agreeing on the business strategy."

The EU's Sustainable Finance Disclosure Regulation (SFDR) rules came into effect on March 10, requiring institutional investors to publish ESG-related risks and impacts by classifying all their investment funds into three categories of sustainability level – grey, light green and dark green – and to adjust their documentation to reflect this. EU Taxonomy Regulation establishes the criteria for determining whether specific economic activities contribute to environmental objectives. The EU will revise the Non-Financial Reporting Directive (NFRD), which made it mandatory in 2018 for certain companies to disclose non-financial information, to support implementation of the EU Taxonomy and the SFDR.

"This is just the beginning of a trend," said Beltratti. "It is not a fad that will go away in a couple of years."