Sustainability | ~ 3 min read

How sustainable is your investment?

Defining sustainable investments has been a persistent challenge for the industry. Regulatory developments have added to this challenge by providing a general definition while leaving the door open for different interpretations.

According to the European Union’s Sustainable Finance Disclosure Regulation, or SFDR, an investment must satisfy three criteria to qualify as “sustainable”:

  1. The economic activity of the investment must provide a positive contribution to an environmental or a social objective.
  2. The investment does not significantly harm any other environmental or social objective.
  3. The investee company must follow good governance practices.

Since the introduction of SFDR in 2021, there has been uncertainty across the investment industry, particularly about the interpretation of the notion of “sustainable investments”. Divergent interpretations have appeared in the market, which can be clustered into two main approaches:

  • Activity-based: the percentage share of a company’s revenue from positively contributing activities is considered its sustainable investment share, provided the “Do No Significant Harm” principle and good governance criteria are satisfied. For example, ABC Energy Company, with a split of 30% revenues from renewable power generation and 70% from non-renewable power generation, would have a 30% sustainable investment share.1
  • Company-level: here the sustainable investment assessment is binary – yes or no – and is determined by an investment manager’s in-house methodologies and assumptions. Typical methodologies consider one or more of the following elements: a minimum percentage sustainable revenue share, a net-zero commitment, a top ESG2 score performance or a specific key performance indicator. Using the same example, an investment in ABC Energy Company might be classified as a “sustainable investment” because at least 20% of its revenue is from renewable power generation.

The European Commission confirmed in its SFDR Q&A that the definition of ”sustainable investments” is non-prescriptive, and that investment firms must carry out their own assessments and disclose their underlying assumptions.

Our view

We applaud the motivation behind the overarching regulatory initiative, but we think the opportunity for creating a market standard for such an important assessment has been missed by the European Commission. While this may increase the potential for innovation in sustainable strategies, it could limit funds’ comparability for clients.

We believe that an activity-based approach is more accurate and allows us to integrate our internal sustainability convictions into these assessments. Our proprietary methodology draws on in-house research expertise across our key themes of climate change, planetary boundaries and inclusive capitalism. Additionally we leverage the EU Taxonomy targets and the UN Sustainable Development Goals as guidance for the definition of our internal standards.

This methodology provides our investment professionals with a powerful tool to support clients in achieving their sustainability objectives by identifying companies that contribute to a more sustainable future.

1 Assuming the company satisfies the “do no significant harm” principle and follows good governance practices.
2 Environmental, Social, Governance

  • Disclaimer
    Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

    This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

    This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).

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