The question of whether sustainable investments actually make a difference was one of the reasons why Eurosif revised its methodology for its market studies
For more than two decades organisations such as the national Sustainable Investment Forums (SIFs) and Eurosif have published statistics about sustainability-related investments. Such market studies typically gathered data on a range of different sustainability-related investment approaches – such as the “best-in-class” approach – and aggregated them to one of a number of “sustainable investments”.
While such statistics are helpful to provide a broad picture of market trends for overall sustainability-related investments in terms of capital flows and total volumes, questions may arise as to what these studies consider “sustainable”.
Furthermore, these statistics did not differentiate between investments based on their investment strategy and/or objectives, such as to actively support the transition towards a more sustainable economy. Since the introduction and rollout of the EU sustainable finance framework the notion of “transition” is becoming an increasingly prominent feature of the European sustainable investment market. As such, an important industry question is: do sustainable investments actually make a difference?
This question and the recent developments in European regulation were the drivers behind Eurosif’s decision to update the methodology for market studies on sustainability-related investments, putting impact at its core.
Published last week, the new methodology aims to more accurately reflect current approaches to sustainability-related investment across Europe. It is designed to reflect the evolving nature of the market and proposes four distinct categories of sustainability-related investments that reflect investments’ “ambition level” for actively contributing to the transition towards a sustainable economy.
These categories are: Basic ESG Investments, Advanced ESG Investments, Impact-aligned Investments, and Impact-generating Investments.
Company vs investor impact
The underlying concept is to enhance the level of transparency as to how capital flows support the transition to a sustainable real economy. While this is also the explicit purpose of many regulatory developments, one aspect is often neglected or missing: the explicit link to impact.
“The new model will help the industry better track flows across investment strategies and will help policymakers in assessing whether they are achieving their sustainability-related policy goals”
For example, the EU Sustainable Finance Disclosure Regulation (SFDR) does not sufficiently exploit the potential contribution of investments in a transition towards a more sustainable economy. The SFDR’s definition of sustainable investments in Art. 2(17) does not distinguish between investor and company impact, one of the basic concepts in understanding how investors can achieve impact.
Company impact describes a real-world change, while investor impact is evident in cases when such a change is initiated/induced by the investor. The new Eurosif methodology reflects on this distinction in detail.
Two core features of the proposed approach are that it applies to all asset classes and that investments only qualify as one of the four categories if they implement binding ESG, or impact related criteria in their investment process.
The methodology was developed by Eurosif over the course of 2023 in conjunction with practitioners from its SRI Study Group and in cooperation with Eric Pruessner from Advanced Impact Research. Market practitioners from across Europe were also involved.
The methodology will be implemented over the course of 2024 with the first market study expected in 2025 covering the data for 2024. The methodology will also be available to all Sustainable Investment Forums globally and other stakeholders.
With the implementation of the EU’s SFDR and similar regulations across Europe, it was important to update the way sustainable and responsible investments are captured by Eurosif to reflect the current market environment. The new model will help the industry better track the flows across various investment strategies and will help policymakers in assessing whether they are achieving their sustainability-related policy goals.
The industry is in a transition period and it’s important that investors in sustainable investments can understand and be confident in the impact that their investments are aiming to achieve. The update of our market study methodology is designed to help with this.
Will Oulton is the chair of Eurosif, and Timo Busch is professor of management and environmental sustainability at University of Hamburg
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