Regulation – indifference to sustainable investment

Quirin Private Bank: Today I brought you again something from the category “Well meant it’s unfortunate it often doesn’t work out well!”.

Because when I look at the current European policy in terms of sustainable investment, this is the feeling that comes to me.

The EU’s willingness to regulate threatens to become a serious enemy of sustainable investment.

Our chief economist recently put it this way: “If things continue like this, then in two years nobody will be investing sustainably.”

But what happened?

Regulation should prevent greenwashing

Sustainability is becoming more and more important in all areas of life, it is also needed more than ever when it comes to investing and is a real megatrend. More money should go into sustainable investment if political actors have their way.

To prevent greenwashing, there are many regulations – paragraphs and corresponding laws intended to prevent investment products from being declared sustainable which are not at all.

So far so good.

Practical implementation is difficult

But the practical implementation of this correct and important goal is not so easy. Good intentions to prevent label fraud are overshadowed by multi-layered sustainability criteria, ongoing complexity and therefore lack of asymmetry.

This makes it harder for investors to find the right sustainability product than it is easier.

Even strict rules for sustainable investment

In addition, new regulatory standards are frequently triggered with limited preparation time for service providers. Even stricter sustainable finance rules have come into force since January – thanks to the second phase of the EU’s Disclosure Regulation.

I don’t want to go into too much complicated details here today. The truth is: Since January 1, 2023, for example, a new sustainability indicator has to be reported according to EU standards for all investment products declared sustainable.

Problem: For many products, this important figure cannot (yet) be collected because the necessary database of the underlying investment does not yet exist. And these products are then considered unsustainable by regulation – regardless of how they invest in de facto monetary sustainability.

To put it mildly, that is nonsense.

This important figure makes it more difficult to compare different products instead of easier. The previous sustainability paragraphs were already confused and could not be distinguished from each other. This new additional figure makes everything more complicated without indicating a single millimeter improvement for investors.

On the contrary: Even blockbuster funds that are generally and unquestionably considered sustainable are classified as unsustainable on the basis of this indicator.

User-friendly, understandable information that makes investment decisions easier looks different.

Good intentions, poor execution

Please don’t get me wrong: The intention behind key figures is good, so they are not entirely wrong. And precisely because this intention is so important, the actors involved should choose the right way.

However, more important statistics and more bureaucracy is (again, I would like to add) not the way to choose.

government fraud

In my opinion, behind the will to control is once again the illusion that the government can effectively manage social change down to the smallest detail. But that will not work, as much of the historical experience of the organized economy has taught us.

Instead, it would make more sense, because it is more promising, to trust market systems. So that there is no misunderstanding here either: Politicians can and must even set the framework in which the goals will be reached in time, in which the limits are set for the market players.

I do not want to defend greenwashing. On the contrary: Indeed because sustainable change in our society is so important – also due to the way we all invest – politicians should have more faith that the market can carry out this complex adjustment process within a clear and meaningful framework environment for success. , instead of trying in vain to explain everything bureaucratically down to the last decimal point.

Bureaucracy overload: more documentation

By the way: In addition to new important statistics, increased control also means more advisory documents. However, the problem that really needs to be solved – to create more transparency and avoid greenwashing – cannot be solved in this way, even if it seems normal at first glance.

Here I see a clear parallel to the implementation of the MiFID II money market directive – it was intended to bring more transparency and thus provide better advice to investors, but largely failed to achieve this goal.

66% of respondents to a representative survey indicated that they had not read the advisory documents related to MiFID II.

Why? Because the documents are too broad or unclear or the average person finds it difficult to categorize the information.

Regulation does not solve the real problem

More documents may also have very different consequences for sustainable investment than the political side expects.

So it can happen that people continue to invest in sustainability, but do not take into account stronger controls and in the worst case the most detailed documents end up in the waste paper basket unread.

Then all regulations are meaningless, because greenwashing has not yet been identified – the investor does not see closely because of the chaos of the papers. Or the detailed documentation even keeps investors away and they leave sustainable investment (“Before I read all this and answer many questions, I would like to tick ‘no'”).

And for people who continue to invest sustainably, basically nothing changes at all: documents alone do not solve the problem of transparency – they still rely on basic and independent advice.

Vulnerability to sustainable investment

In summary, it seems to me that the parties involved in their due diligence – to promote sustainable investment, to prevent greenwashing – have thrown the baby out with the bathwater. Monopoly excess wants the good and possibly achieves the exact opposite – almost Faustian.

The EU’s new sustainable investment guidelines and more detailed documentation are well-intentioned, but poorly executed and, as they stand today, are likely to make sustainable investment unprofitable.

It remains to be hoped that the parliament will recognize this quickly and respond accordingly.

Author: Karl Matthäus Schmidt, CEO of Quirin private bank and founder of quirion