Finding financial investments capable of reconciling profitability with environmental preservation and good social and corporate practices in Brazil should become a simpler and more transparent task from 2022 onwards. This is what Anbima (Brazilian Association of Financial and Market Entities) expects Capital), which has just concluded a public consultation on the voluntary self-regulation of the sector to identify sustainable investment funds.
As of January 3, this type of fund may request the inclusion of the suffix IS (Sustainable Investment) in the name, if it is qualified according to the criteria established by Anbima.
With this, the domestic financial market intends to draw a line between funds that have sustainability as a principle and those that have investments that only integrate ESG aspects, which stands for ESG (Environmental, Social and Governance).
Products that consider sustainability issues in their applications, but are unable to bear the IS seal, will not be prevented from including this information in their promotional material.
The idea is to organize the offerings on the retail shelves of invest to make them more accessible to people who are increasingly interested in how their money can contribute to global causes.
The self-regulation of national market entities takes place after two years of dizzying growth in interest in the term ESG, whose Google searches increased tenfold between April 2020 and its peak in August 2021.
A year before the start of this boom, in 2019, BlackRock’s CEO, Larry Fink, had mentioned in his annual letter to managers that the world was going through the largest generational transfer of wealth in history, with around US$ 24 trillion ( R4 130 trillion) passing from baby boomers to millennials, whose investment preferences include “environmental, social and governance issues,” he wrote.
In 2020, the letter from the director of the world’s largest fund manager was almost entirely dedicated to the discussion of the economic relevance of climate change. In addition, in another letter, addressed to clients, BlackRock identified sustainable investments as a priority.
The documents gave relevance to the acronym ESG, coined a decade and a half earlier in the wake of the emergence of the Who Cares Wins initiative – Who Cares Wins, in Portuguese – of the United Nations in partnership with the Swiss government and endorsed by institutions responsible for managing the more than $6 trillion (BRL 32 trillion) in assets, including the World Bank.
The explosion of interest in ESG investments also coincided with the moment when the world economy was forced to slow down to face the new coronavirus, an environmental threat with extraordinary social consequences.
For better or for worse, funds of all classes came to be called green, sustainable or ESG.
If on the one hand the increase in supply is positive, on the other hand, the disorder has opened the way for greenwashing – something like a green bath or makeup to attract buyers to products that are little or not sustainable.
The prevention of greenwashing in the local market stimulated the creation of a sustainability advisory group at Anbima, in 2020, formed by executives from member institutions.
“Many times you find a green background that is not green”, says Carlos Takahashi, vice president of Anbima and coordinator of the sustainability advisory group. “Those were choices made over time that actually relate to a cool name with a cool appeal, but not necessarily ASG funds.”
Adopting European and American models as references, the initiative considers, however, that the ESG agenda still requires maturing in Brazil and this should bring some initial tolerance in the evaluation of candidates for the new identification.
“We have good references, but we are going to adjust the levels to our market”, says Takahashi. “We are not going to place the bar on the ground, but we will place it at a reasonable height,” he says.
In the new version of Anbima’s Third-Party Resource Management Code, a fund to be considered sustainable will have to be evaluated according to methods that attest to its commitment, in addition to having the portfolio under constant monitoring.
Managers will be analyzed mainly for their ability to identify and monitor ESG investments through tools, processes and qualification of their teams.
“We will identify products that already have objectives, process, information, team and are fully focused on the ASG and we will check those that do not yet, but already claim to integrate these criteria, to encourage them to be 100% ASG in the future”, he says Takahashi.
Incorporating the assessment of ESG aspects into investments, giving these characteristics similar importance to that given to financial criteria, will differentiate this new category of funds from the traditional ones, whose classification is usually determined only by the assets that make up the portfolio.
By establishing clear criteria on the type of commitment that fund managers must make to offer sustainable products, the market will try to avoid generic classifications – intentional or not – that lead investors to eventually buy a pig in a poke.
“It was a common thing to see products that had sustainability in the title but that didn’t integrate social, environmental and governance factors into the investment process,” says Helena Masullo, head of ESG strategy at XP Inc.
“Sometimes they had that name because they donated the management fee to a philanthropic institution, but this is not integrating ESG processes, so it created this confusion”, comments Masullo.
Long-term performance favors sustainable investment
Regardless of the motivation that generational change points to as a trend for investors’ decisions, stability can play in favor of sustainable investments in times of greater volatility.
“Return is the biggest discussion in the market about ESG,” says Masullo. “When viewed in the long term, which is the main favorable argument, investments aligned with ESG issues bring this overcoming.”
Launched in December 2005 on the Brazilian Stock Exchange, the ISE (Corporate Sustainability Index) is the oldest benchmark in the country for analyzing the performance of assets that, in some way, are related to what is now understood as ESG.
Until last week, the ISE had accumulated gains of almost 273%. In the same period of approximately 16 years, the Ibovespa, the Stock Exchange’s reference index, advanced 225%.
ISE and Ibovespa fell 9.83% and 10.66% this year, respectively, reflecting the unfavorable environment for risky investments due to the combo of health, political and fiscal crises in the country.
The comparison between the indices is not necessarily fair with the ISE, which has only 30 companies, which represents less than a tenth of the approximately 400 companies that make up the Ibovespa.
In practice, the thickness of the ISE’s mattress to absorb market swings is smaller and a problem involving only one company can significantly affect the performance of the index.
Furthermore, the creation of the ISE took place at a time when sustainability was more related to intention than to practice, although its methodology has been adjusted over time.
Even bearing these disadvantages, the ISE has a victorious trajectory in relation to the Ibovespa.
The expectation about the products to be labeled as IS is that, from the effective incorporation of the ESG criteria in the return and risk analyses, they will bring consistent long-term gains and be resilient in periods of volatility
“Something that is well structured in terms of governance, that has good practices with its employees, customers and suppliers and adequate use of natural resources, by itself, would lead us to the conclusion that in the long term, the results will be better and more resistant” , says Takahashi, from Anbima.
How will it work
Initially, only equity funds and fixed income funds are eligible to include the IS suffix.
Anbima’s intention is to expand this identification to other classes of funds, also reaching multimarket and structured funds.
Products that do not have sustainable investment as their main objective, but that choose to mention in their promotional material that they include issues of this nature, will also be subject to supervision by Anbima.
According to the classification currently in effect, there is no broader identification for sustainable funds.
The only option that exists is the “sustainability/governance” sub-category, applicable exclusively to equity funds. This sub-category will cease to exist after the 12-month transition period from the entry into force of the new rules for IS funds.
Anbima’s classification will not be prescriptive in relation to the percentage of exposure to certain assets.
The focus will be on the consistency of the methodologies used to choose investments, the primary sources of data and the types of tools used, as well as engagement metrics and policies, in addition to the continuous monitoring actions of these instruments.
Given the enhancement of the aforementioned characteristics, there will be a reduction in dependence on third-party certifications, external ratings or seals. This does not mean that these instruments will be discarded, but rather that they cannot be considered sufficient in isolation to ensure sustainable identification.
The publication of the new ASG Anbima Guide, scheduled for this month, should provide guidelines to help managers in relation to regulation.
.
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
