Extreme weather events and the energy crisis caused by the Ukraine-Russian conflict were a clarion call to governments in Europe and investors to accelerate the energy transition to net zero. While new regulation has been positive for ESG-focused fund managers, developing a uniform energy policy in the EU has been challenging.
“The extreme events we had in Europe this year was a very big wake-up call because we thought it was only something which could happen in emerging countries,” said Philippe Zaouati, chief executive of portfolio manager Mirova, an affiliate of Natixis Investment Managers with €25.5 billion of assets under management.
“We [have] a very big shortage of energy and this could cause a lot of very big issues for citizens and companies.”
The EU has ambitious plans to scale up renewable generation and commercialise hydrogen in the medium to long term. In the short term, it has agreed to claw back revenue from non-gas generators such as solar and wind generation companies to raise cash for governments to subsidise consumers and industry from skyrocketing energy bills.
Speaking at Investment Magazine’s Equities Summit in Sydney on October 11, Zaouati said extreme weather events, the energy crisis coupled with the Russian-Ukraine war has elevated energy transition in Europe in the fore of governments’ thinking but developing a uniform energy policy was difficult.
“The only problem is the differences between the European countries because there has never been a European energy policy,” Zaouati said. “We have one energy market, so we have the same price of gas and electricity everywhere in Europe but there is no energy policy.”
He cited the example of bi-partisan negotiations between various governments to classify nuclear energy and gas as an environmentally sustainable economic activity in EU Taxonomy to the dismay of environmentalists and the impact investment community. “It was really a mess because all the investment community, especially ESG investment community, was really upset about this decision,” he said.
Regulation spurs capital inflows
While energy policy development in the EU has been difficult, regulation in the sustainable finance sector is helping funnel capital inflows into ESG-focused asset managers.
The EU’s Sustainable Finance Disclosure Regulation are a new set of rules to compel asset managers to disclose the differing levels of sustainability integration and focus of each investment strategy, aimed at improving transparency and preventing greenwashing.
Under the new classifications, an investment strategy or fund will be labelled Article six if it does not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG funds such as tobacco companies or thermal coal producers. An Article 8 fund is one that promotes environmental or social characteristics and an Article 9 fund is one that has sustainable investment as its objective and an index has been designated as a reference benchmark.
“I’m very positive about the European regulation,” said Zaouati, who was part of a high-level expert group established by the European Commission to advise on an action plan that resulted in the SFDR.
About 50 per cent of capital flowing into funds is going to Article 8 and 9 funds and “it’s becoming more and more difficult for distributors to distribute Article six funds,” he said.
