From December 6 to 11, 2020, China and the EU held the 35th round of negotiations on the Comprehensive Agreement on Investments (“CAI”), a bilateral treaty that will replace the 26 existing bilateral investment treaties between 27 individual EU Member States and China, thus providing a uniform legal framework for EU-China investment ties.
The necessity of this agreement is due to the increased cooperation between China and the EU, and to the high volumes of bilateral trade and investments (especially from the EU to China), that makes the urgency of shared principles and rules more and more appreciable.
According to Eurostat data, in 2019 the EU had exported goods worth approximately €198 billion (US$242 billion) to China and imported goods worth €362 billion (US$442 billion) from China, with a bilateral trade worth some US$650 billion last year, according to Bloomberg.
With reference to investments in 2019, Chinese foreign direct investment in the EU continued to decline, mirroring the decline in Chinese outbound investments globally. However, China continued to be the second largest FDI recipient after the US counting – according to Rhodium Group – US$1.6 billion of newly announced FDI projects by EU companies in China in the last quarter of this year.
The CAI’s main objectives would be an enhanced protection of EU investments in China and vice versa, improved legal certainty regarding the treatment of EU investors in China, reduction of barriers to investing in China, and as a result, increasing bilateral investment flows and improved access to the Chinese market.
CAI core focus
Notwithstanding the fact that the content of the articles of the investment agreement has not yet been disclosed to the public, the cornerstones of the agreement can be summarized as follows:
- Provide for new opportunities and improved conditions for access to the EU and Chinese markets for Chinese and EU investors (more specifically, broadening the EU investors’ access to the Chinese market by eliminating quantitative restrictions, equity caps, or joint venture requirements);
- Address key challenges of the regulatory environment, including those related to transparency, predictability, and legal certainty of the investment environment (with reference to the Chinese market, by allowing EU investors to have access to information affecting their business, but also giving them opportunity to comment on relevant laws and regulations, as well as ensuring clear, fair, and transparent procedures);
- Establish guarantees regarding the treatment of EU investors in China and of Chinese investors in the EU, including protection against unfair and inequitable treatment, unlawful discrimination, and unhindered transfer of capital and payments linked to an investment;
- Ensure a level playing field by pursuing, inter alia, non-discrimination as a general principle subject to a limited number of clearly defined situations;
- Support to sustainable development initiatives by encouraging responsible investment and promoting core environmental and labour standards;
- Allow for the effective enforcement of commitments through investment dispute settlement mechanisms available to the contracting Parties and to investors.
It shall be noted that the main content of the agreement will be based on specific EU requests towards China regarding reforms and amendments of its investments’ legal framework. This is because under the EU perspective and based on the EU companies’ experiences in China, the Chinese laws do not grant the same rights and obligations to both, domestic and foreign companies, thus creating asymmetries between enterprises based on their nationality. Hence, with the CAI, the EU seeks to create new investment opportunities for European companies by opening China’s market and eliminating discriminatory laws and practices.
In the light of above, it is clear how the innovation brought by the CAI lies in the wide scope of this agreement, that, unlike the BITs that cover only the post-entry protection of investment, should also include provisions for the pre-entry phase (ensuring that foreign investors have the same market access as domestic investors), as well as provisions on investment-related sustainable development, level playing field issues, such as transparency of subsidies and rules on SOEs and forced technology transfer.
The negotiations of the EU-China CAI were first announced in October 2013, when the European Council adopted a mandate for the Commission to negotiate an investment agreement with China on behalf of the EU, and, in November 2013 the launch of negotiations was announced at the 16th EU-China Summit.
The first round of talks took place in January 2014, but only in 2016 the parties agreed upon the main scope of the CAI and moved on to specific text-based negotiations.
At the 20th EU-China Summit in July 2018, the parties had a first exchange of market access offers against the backdrop of persisting policy divergences on core investment provisions, and at the 21st EU-China Summit in April 2019, the parties committed to conclude the CAI in 2020.
During this phase of negotiations, from the 20th to 24th rounds, the parties discussed some major topics, including rules on financial services, capital transfer, national treatment related commitments, state-to-state dispute settlement, and investment-related issues concerning sustainable development.
At the 25th round in December 2019, the second exchange of market access offers took place.
Here below a short summary of the negotiations from 2013 to 2019:
Since the decision made by the parties to conclude the CAI within 2020, the number of rounds intensified and from January to December 2020 China and EU held several meetings.
Starting from the beginning of this year, from the 26th round to 28th round, the parties discussed the revised offers exchanged in 2019, while during the 30th and 31st rounds, the dialogues continued and covered level-playing field issues, including disciplines on SOEs, transparency of subsidies, and forced technology transfers – bringing a significant progress in the negotiations.
Despite this, according to the press release on the 8th EU-China High-level Economic Dialogue (July 28, 2020), much work remained to be done on market access in the telecommunication sectors, health, biotechnology, new energy vehicles, and sustainable development.
The 32nd round, held from 21st to 25th September 2020, focused on sector-specific market access and the mechanism for addressing differences on sustainable development, but some progress was also registered with reference to the rules on entry and stay of business visitors and intra-corporate transferees.
The 33rd and 34th rounds negotiations – held respectively on October 19-23, 2020 and November 16-20, 2020 – focused, among others, on sustainable development, competition related issues, capital movements, and transfers as well as entry and temporary stay of business visitors for establishment purposes and intra-corporate transferees. In addition, they discussed about taxation matters and horizontal exceptions.
The 35th round held from December 6-11, 2020 will likely not be the last one, but according to state media Xinhua, the Chinese Ministry of Commerce had released a statement announcing that positive progress was made in the negotiations with the EU.
Here we provide a short summary of the 2020 CAI Negotiations:
What are the main obstacles to concluding the CAI?
China and the EU made considerable progress on the CAI negotiations, but there are still some important topics on which the parties have not reached an agreement yet, and that will have to be further discussed.
The negotiations are now focused on some EU major requests concerning the opening of Chinese market (which is still restricted to foreign investors in key sectors, such as telecommunication services, information and communication technology, health, biotechnology, financial services, and manufacturing), and sustainable development.
Considering the broad content of the CAI and the positive impact that it may have on the flow of investments, the signature of the CAI would be a turning point in China-EU relations, indeed leaders of both parties have expressed several times their will to reach such an agreement.
However, EU leaders remarked that China must commit to implement concrete reforms in its legal system to remove the asymmetries existing on the Chinese market – for instance, the more favourable treatment granted to SOEs compared to private companies, or the restricted access to certain industries to foreign investors – thus posing this as a condition for the signature of the CAI.
On the other side, to quote President Xi Jinping’s words: “the two sides should adopt a positive and pragmatic attitude, speed up negotiations on the China-EU investment agreement to achieve the goal of completing the negotiations by the end of this year, working to upgrade cooperation, facilitate the post-epidemic world economic recovery and jointly safeguard an open trade and investment environment”.
Looking forward, what can we expect?
In light of the above, the relevance of such agreement is clear, but there are doubts that the parties will be able to reach an agreement by the end of this year. The delay may also be attributed to the election of the new US president; once Joe Biden gets sworn into office in January, China and the EU will likely have to re-evaluate their relations with the US and this may have an impact on CAI negotiations.
To this regard, the Biden White House’ approach towards both China and the EU will have a significant impact on the global economy and international relations. If the three major economies can find an alignment, this will be for the benefit of the whole world. In this context, the CAI may represent not only a strong foundation towards a sustainable cooperation between China and the EU but can also provide a reference point for China-US bilateral negotiations about issues, such as the Phase Two trade deal. If this will be the case, the relations among China, EU and the US will be based on similar principles and will tend to achieve similar goals, thus curtailing both current and potential conflicts in the future.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
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Researchers Hot Stock Tip: Avoid This Type of Investment Fund – SciTechDaily
Specialized ETFs invest in trendy, overvalued areas, study finds.
“Buy low and sell high” says the old adage about investing in the stock market.
But a relatively new type of investment fund is luring unsophisticated investors into buying when values are at their highest, resulting in losses almost immediately, a new study has found.
The lure? Buying into trendy investment areas like cannabis, cybersecurity and work-from-home businesses.
“As soon as people buy them, these securities underperform as the hype around them vanishes,” said Itzhak Ben-David, co-author of the study and professor of finance at The Ohio State University’s Fisher College of Business.
“They appeal to people who are not sophisticated about investing. They may have an extra $500 and decide to try to make what they think is easy money in the stock market.”
The research was presented earlier this month at the annual meeting of the American Economic Association and is available on the SSRN preprint server.
These investment funds are a particular type of Exchange Trade Funds, or ETFs, which were first developed in the mid-1990s. ETFs are investment funds that are traded on stock markets and are set up like mutual funds, holding a variety of other stocks in their portfolios.
The popularity of ETFs is growing quickly. By the end of 2019, in excess of $4 trillion was invested in more than 3,200 ETFs. The original ETFs were broad-based products that mimicked index funds, meaning that they invested in large, diversified portfolios, such as the entire S&P 500, Ben-David said.
But more recently, some companies have introduced what Ben-David and his colleagues call “specialized” ETFs, which invest in specific industries or themes – usually ones that have received a lot of recent media attention, like work-from-home opportunities.
“These specialized ETFs are often promoted as the ‘next big thing’ to investors who are wowed by the past performance of the individual stocks and neglect the risks arising from under-diversified portfolios,” said study co-author Byungwook Kim, a graduate student in finance at Ohio State.
For the study, the researchers used Center for Research in Security Prices data on ETFs traded in the U.S. market between 1993 and 2019.
They focused on 1,086 ETFs. Of those, 613 were broad-based, investing in a wide range of stocks. These are the Walmarts of ETFs, appealing to value-conscious consumers, Ben-David said.
The remaining 473 were specialized ETFs, investing in a specific industry, like cannabis, or multiple industries that are tied by a theme. These are the Starbucks of ETFs, appealing to consumers who are willing to pay more for what they see as higher quality, he said.
“The securities that are included in the portfolios of specialized ETFs are ‘hot’ stocks,” said co-author Francesco Franzoni, professor of finance at USI Lugano and senior chair at the Swiss Finance Institute. “We found that these stocks received more media exposure, and more positive exposure, than other stocks in the time leading up to the ETF launch.”
In 2019, the new ETFs included products focusing on cannabis, cybersecurity and video games. In 2020, new specialized ETFs covered stocks related to the Black Lives Matter movement, COVID-19 vaccine, and the work-from-home trend.
The performance of broad-based versus specialized ETFs was very different, the researchers found.
Broad-based ETFs had earnings over the study period that were relatively flat, the analysis showed. But specialized ETFs lost about 4 percent of value per year, with underperformance persisting at least five years after launch.
“Specialized ETFs, on average, have generated disappointing performance for their investors,” said co-author Rabih Moussawi, assistant professor of finance at Villanova University.
“Specialized ETFs are launched near the peak of the value of their underlying stocks and start underperforming right after launch.”
The study found that the types of investors who bought into specialized ETFs were different from those who invested in the broad-based products.
For example, large institutional investors who have professional managers, such as mutual funds, pension funds, banks and endowments, generally avoid specialized ETFs.
The study found that institutional investors own about 43 percent of the market capitalization of broad-based ETFs in their first year, but less than 1 percent of the capitalization of specialized ETFs.
In contrast, data from one online discount brokerage that caters to individual investors showed that its customers are much more likely to invest in specialized than broad-based ETFs.
Other research has suggested that investors using that discount brokerage exhibit “sensation-seeking behavior” and their holdings can be described as “experience and curiosity holdings,” Ben-David said.
The results suggest that most people should be wary of investing in specialized ETFs, Ben-David said.
“If you purchase a specialized ETF, you are likely to lose money because their underlying stocks are overvalued,” he said.
Meeting: American Economic Association 2021 annual meeting
Here’s Why Chewy Inc. (CHWY) Is A Good Investment Today – Yahoo Finance
If you’re looking to build a portfolio of stocks to buy with just $5,000, the advent of fractional share ownership has made it a whole lot easier. Google the words “fractional share portfolios,” and you get 527,000 results with everything from reviews on seven of the best fractional share investing brokerages to links to some of the leading players in this burgeoning area of the markets. Many think of Robinhood when they think fractional, but the truth is almost every major online broker in this country’s got some offering or service.InvestorPlace – Stock Market News, Stock Advice & Trading Tips Heck, I can remember years ago, when FolioFN was the only game in town. Launched in 2000, it was acquired by Goldman Sachs (NYSE:GS) in May 2020. FolioFN’s self-directed accounts are scheduled to be transferred to Interactive Brokers (NASDAQ:IBKR) early in 2021. In the meantime, for those who don’t want to do the work of constructing a $5,000 portfolio of stocks to buy, here are 10 recommendations to help get you started. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) Tesla (NASDAQ:TSLA) Nvidia (NASDAQ:NVDA) SVB Financial (NASDAQ:SIVB) Roku (NASDAQ:ROKU) Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) Dollar General (NYSE:DG) Apple (NASDAQ:AAPL) Williams-Sonoma (NYSE:WSM) Thor Industries (NYSE:THO) 9 Stocks That Investors Think Are the Next Amazon Their share prices will add up to $5,000 or less. To make things interesting, all 10 stocks must have share prices exceeding $100. Stocks to Buy: Alphabet (GOOG, GOOGL) $1,740 Source: BigTunaOnline / Shutterstock.com It’s funny, I had intended to include Amazon (NASDAQ:AMZN) in my list of 10 stocks to buy, but given I was limiting my names to those companies with shares prices greater than $100, the e-commerce giant’s $3,166 share price would have made it awfully hard to fit nine more under $5,000. So I went with Alphabet, a company I didn’t write about at all in 2020, but helps me achieve my task. InvestorPlace’s Mark Hake recently suggested that rising ad sales make it an attractive investment in 2021. My colleague compares Google to the valuations of Apple, Microsoft (NASDAQ:MSFT), and Amazon. He reckons that Google should have a similar valuation to the three companies at $1.43 trillion or 6.7 times sales. As I write this, Google’s market capitalization is $1.18 trillion, 17% below Hake’s simple calculation, which puts its share price at $2,112 per share. I like the upside. Tesla (TSLA) $845 Source: franz12 / Shutterstock.com The second-highest share price in our $5,000 portfolio, we can thank Elon Musk for doing a five-for-one stock split in August 2020. Without it, TSLA would take up 86% of our investment capital. I’m an unabashed Tesla fan, so I’m not going to give you reasons why the valuation is over-the-top, although there’s no question it puts all the other large car companies to shame with its $810 billion market cap. InvestorPlace contributor Matt McCall recently gave investors some wise advice regarding the electric vehicle (EV) maker. McCall believes that rather than griping about the price you have to pay for its shares, embrace the fact that even the mighty Tesla has corrections, so buy like crazy on the rare occasion that it happens. To illustrate his point, McCall references its pullback in September 2020, shortly after its stock split. On Aug. 31, it was trading just under $500. In a week, it fell 34% after Tesla was left off the annual additions list for the S&P 500. 7 Cheap Stocks to Buy as Democrats Gain Control Ultimately, Tesla was added to the index on Dec. 31. As money managers added TSLA to their portfolios, it moved even higher. Nvidia (NVDA) $528 Source: Hairem / Shutterstock.com If you’re one of the lucky investors who joined the Nvidia bandwagon five years ago when it was trading around $26, you’re sitting on an annualized total return of more than 79% through Jan. 13. It’s crazy to think that things can get any better for NVDA shareholders over the next five years. Still, they actually could, given the growth in gaming, cloud computing, and artificial intelligence. As my InvestorPlace colleague, Faizan Farooque, recently stated, you most certainly won’t be buying Nvidia if you’re a value investor — it trades at 45 times its forward earnings, far higher than many of its peers — but when it can grow sales at 50% a quarter and continue to beat analyst expectations, it most certainly deserves a premium valuation. In June 2019, I argued that Nvidia’s free cash flow made it a great stock to buy on dips. At the time, it had lost about half of its value over nine months — October 2018 to June 2019 — and was trading around $145. Some 18 months later, it’s up almost four-fold and generating more than $4.2 billion in 12-month free cash flow. Buy some now and wait for the next big dip. It’s bound to happen sooner or later, no matter the near-term prospects. SVB Financial (SIVB) $465 Source: Pavel Kapysh / Shutterstock.com I’m not going to say too much about SVB Financial because it’s one of those bank stocks to buy that you have to get to know for yourself to understand why it’s so special. You wouldn’t think this was the case by the analyst coverage of its stock. At the moment, 21 analysts cover SIVB, with eight rating it a buy and 12 a hold with an average price target of $424.49. Sure, it’s come a long way over the past year compared to its peers — it has a one-year total return of 74.2% — but that’s because investors recognize that the bank’s laser-like focus on providing lending, asset management, and banking services to innovators and entrepreneurs will always be in demand. Recently, it announced that it would pay $900 million to buy Boston Private Financial Holdings (NASDAQ:BPFH) for a combination of cash and stock. The Boston-based private bank specializes in wealth management and other banking services. Together, SVB Financial’s wealth management business will have almost $18 billion in assets under management. The 7 Best Marijuana Stocks on the Markets Right Now Continue to ignore SIVB at your peril. Roku (ROKU) $418 Source: JHVEPhoto / Shutterstock.com The streaming platform has gotten off to a hot start in 2021, up 26% year-to-date and more than 205% over the past 52 weeks. Roku and HBO Max parent, Warner Media, buried their longstanding disagreement recently by announcing that the streaming service would be available on Roku as of Dec. 17, 2020. By getting a spot on Roku, HBO Max is now on all the major over-the-top platforms. “We believe that all entertainment will be streamed and we are thrilled to partner with HBO Max to bring their incredible library of iconic entertainment brands and blockbuster slate of direct-to-streaming theatrical releases to the Roku households with more than 100 million people that have made Roku the No. 1 TV streaming platform in America,” Scott Rosenberg, SVP of Roku’s platform business, said in a statement. The key part of the above statement is that Roku believes that all entertainment will eventually be streamed. I couldn’t agree more. That’s why I recommended ROKU stock in December 2017 and still recommend it among stocks to buy in 2021. Berkshire Hathaway (BRK.A, BRK.B) $235 Source: Jonathan Weiss / Shutterstock.com I recently read an article about the reasons why Warren Buffett failed in 2020. This kind of analysis of the Oracle of Omaha has been going on for years, possibly as long as Buffett’s been investing in stocks to buy. Yes, Berkshire Hathaway severely underperformed the S&P 500 in 2020 — up 2.5% versus 16.5% for the index — but I’ve always believed that the biggest boost to BRK stock will come when the holding company has to be methodically wound down due to the passing of Buffett and Charlie Munger. Consider that its equity portfolio, which is massive at $271 billion, represents just one-third of Berkshire’s assets at the end of September 2020. I can assure you that the true value of the $418 billion or so in privately-owned assets on its balance sheet is worth far more than this. When the time comes to wind it down, the board will do what’s necessary to ensure fair value is obtained for every business. It’s possible the process could take a decade or more. The 7 Best Startups You Can Buy on StartEngine Right Now When people say that Warren Buffett has lost his touch, they forget that the final tally has not been given. Not by a longshot. Dollar General (DG) $213 Source: Jonathan Weiss / Shutterstock.com It’s not a secret that Dollar General caters to customers that don’t have a tremendous amount of disposable income. It probably also doesn’t come as a surprise that its employees aren’t flush with cash, so the fact that it will pay those of its 157,000 employees who get a vaccine four hours of pay is noble. And smart business. “‘We do not want our employees to have to choose between receiving a vaccine or coming to work,’ Dollar General (DG) said in a press release, noting that its hourly workers face hurdles to getting vaccinated, such as travel time, gas mileage or childcare needs.” If there’s a retailer that has done well during Covid-19, Dollar General would have to be at the top of the list. In early December, Dollar General reported Q3 2020 results that included 12.2% same-store sales growth and a 62.7% increase in earnings per share. As a result, it’s passed on a total of $173 million in 2020 for employee appreciation bonuses. As it continues to open more stores while simultaneously growing its gross margins, the fact that it remembered that its employees are the ones who deliver this good fortune to shareholders is a big reason why DG stock will continue to move higher in 2021. Apple (AAPL) $130 Source: Hadrian / Shutterstock.com Most of the talk around AAPL stock right now revolves around its long-simmering Project Titan and its efforts around delivering its own autonomous electric vehicle. The Verge recently reported that Apple held discussions in 2020 with Canoo (NASDAQ:GOEV), the EV startup using a platform based on a skateboard to provide a much better cabin design for its future vehicles. Canoo apparently just wanted some investment capital. Apple, on the other hand, was thinking more about acquiring the business and integrating it into its existing work in this area. The two didn’t come to an agreement. Canoo went public and Apple’s now working with Hyundai (OTCMKTS:HYMTF) on getting a self-driving EV to market by 2024. Wedbush Securities analyst Dan Ives recently suggested that Apple could be worth $3 trillion by sometime in 2022 due to strong iPhone 12 sales. He projects it could sell as many as 250 million in 2021. “If Apple continues to execute at this pace, a $3 trillion market cap could be on the horizon over the 12 to 18 months,” Ives is reported to have said. 7 Dividend Stocks That Are Growing Their Payouts As I write this, it’s at $2.2 trillion. Williams-Sonoma (WSM) $125 Source: designs by Jack / Shutterstock.com Several news outlets reported that the retailer’s CEO, Laura Alber, sold some Williams-Sonoma stock just before Christmas. Don’t be alarmed; it was only 15,000 shares or 3.5% of her total holdings. And it was part of her Rule 10b5-1 trading plan started in September 2019. As I always like to say, even wealthy CEOs have bills to pay. Over the past year, Williams-Sonoma stock has delivered a total return of 61.4% for its shareholders, including Alber. That’s double the returns of the specialty retail sector as a whole and three times the entire U.S. markets’ performance. In June 2016, I called WSM one of the best retail stocks to buy due to its excellent omnichannel experience. Going on five years later, nothing’s changed about that assertion. During Covid-19, business at the retailer has been full-speed ahead. Here’s what I said about it in December: “It’s got a business that’s ideally balanced between online and brick-and-mortar sales. In the second quarter, it generated 76% of its sales online; in Q3, due to the novel coronavirus constraints, its online sales accounted for 70% of its total revenue — while growing by almost 50% over last year– and that’s during a pandemic,” I said on Dec. 9. “More importantly, its Q3 profits were through the roof — up 151% to $2.56 a share thanks to significantly higher margins — and that was only through Nov. 1. It doesn’t include Black Friday and Cyber Monday.” The world’s going digital, and that’s good news for Williams-Sonoma. Thor Industries (THO) $105 Source: Angel DiBilio / Shutterstock.com There is no question that 2020 was good for recreational vehicle manufacturers such as Thor Industries, as people young and old sought the great outdoors, away from the maddening, Covid-19 crowd. The problem for investors who’ve followed the RV industry for any length of time is that the good times never seem to last. In the case of the novel coronavirus, once vaccines make humans comfortable with packing together in large crowds, the great outdoors won’t be nearly as enticing as Paris or Australia. That being said, the latest push into RVs may be coming from a sub-set of consumers who might actually take to the open road. “All dealers are reporting a high mix of first-time buyers as evident by lack of trade-in units,” said Wells Fargo analyst Tim Conder in a July 15, 2020 note. “Dealers are saying as high as 80% of customers are first-time buyers … vs. the typical 25% mix. The pandemic is driving the purchase decision for new-entrants.” If even half of those first-time buyers stick around long enough to upgrade to a bigger or better model, Thor Industries might not have to worry about the eventual downturn. To me, THO is one of the perfect stocks to buy for the long haul, buying more whenever it corrects by more than 5-10%. On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities. More From InvestorPlace Why Everyone Is Investing in 5G All WRONG Top Stock Picker Reveals His Next 1,000% Winner It doesn’t matter if you have $500 in savings or $5 million. Do this now. The post 10 Smart Stocks to Buy With $5,000 appeared first on InvestorPlace.
EU rules promise to reshape opaque world of sustainable investment – Financial Times
Anders Bertramsen likes to know what he is eating so when he does his weekly shop he checks food labels for nutrients and provenance before choosing products. But in his professional role selecting sustainable investment funds for wealthy investors, he finds it much harder to make such judgment calls.
“It is a maze out there,” says the head of external fund selection at Nordic bank and wealth manager Nordea. “Getting to the bottom of which funds are truly sustainable requires a lot of time and experience.”
For Mr Bertramsen, the EU’s introduction in March of landmark rules mandating greater transparency for environmental, social and governance funds cannot come soon enough. “We will have a lot more data, which will help weed out the managers who talk themselves up on ESG but don’t do anything.”
The sustainable finance disclosure regulations require fund groups to provide information about the ESG risks in their portfolios for the first time. A central plank of the EU’s green deal, they aim to push more capital towards sustainable activities by injecting discipline into the ESG market.
The rules are not just good news for professional investors such as Mr Bertramsen; they will also help retail savers, from millennials to sustainability-focused older people, who want the tools to cut through the ESG noise.
ESG investing has exploded in recent years as investors’ growing awareness of issues such as climate change pushes them to invest in funds that benefit society in addition to generating returns.
ESG funds in Europe attracted net inflows of €151bn between January and October last year, an almost 78 per cent increase from the same period in 2019, according to Morningstar. Yet the boom has been overshadowed by concerns that some providers have been overstating their sustainability credentials to win business, a trend known as greenwashing.
However, the new EU rules will shake up ESG investing by exposing laggards and forcing the investment industry as a whole to improve its offer.
“It is hard to overstate the impact that the regulations will have,” says Thomas Tayler, senior manager at Aviva Investors’ Sustainable Finance Centre for Excellence. “It is going to change the way people run their businesses by putting sustainability right at the heart of the investment process.”
The ambition of the new regime is evident from its scope: it is not solely targeting sustainable funds. Under the rules, all asset managers will have to consider sustainability risks alongside other financial risks, before disclosing to investors how these are managed or why they are not relevant.
Only a few years ago, this approach — known as ESG integration — was the preserve of a handful of ESG specialists, says Mr Tayler. But he adds that the comply or explain nature of the new rules will jolt more asset managers into action, transforming ESG integration into a baseline requirement for all funds.
Meanwhile, the increased reporting requirements imposed will also raise the bar among sustainability-focused asset managers. Under the new rules, funds that claim they go further on ESG — such as impact funds, which place environmental or social goals on a par with financial profit — will have to back up their virtuous statements with clear evidence of their sustainability efforts.
Valentin Allard, senior consultant at research group Indefi, says the fact that ESG managers will have to disclose the same data will make it easier to sort the wheat from the chaff.
“A lot of masks will fall,” he predicts. “Once everyone is reporting against the same indicators, some people might realise they overstretched how green they really are.”
At the same time, the spotlight that the EU framework will shine on ESG is likely to lead to a surge in sustainable fund launches, as asset managers rush to adapt their products to the new world.
“The market will be changed by the regulations,” says Olivier Carré, a partner at PwC Luxembourg. “Asset managers have to decide how they want to be positioned in this new environment.”
PwC believes ESG funds could increase their share of total European assets from 15 per cent to 57 per cent by 2025 on the back of the EU rules, with the bulk of the growth coming from conversions of non-ESG funds into funds compliant with the new regulations.
The onus on managers to up their game is made more urgent by the fact that their clients — pension funds, insurance companies and financial advisers — will also be obliged to consider sustainability under the rules, leading to even greater demand for ESG funds.
However, teething problems with the regulations and questions over how they link up with other EU legislation will probably hinder growth in the ESG industry.
Brussels recently delayed the date by which asset managers will have to submit the bulk of the disclosures following resistance from the industry.
But even with the delay, compliance will be a struggle due to the sheer volume of data that must be gathered. “If I look at how many people in my company are working on [the ESG regulations], it is almost as big as Mifid II was,” says Gilbert Van Hassel, chief executive of €158bn Dutch asset manager Robeco, referring to the sweeping EU markets rules that came into force in 2018.
A major stumbling block for asset managers is sourcing sustainability data from the companies they invest in. The lack of global standards for corporate ESG disclosures means that the availability and quality of information varies wildly.
Sustainable finance trade body Eurosif estimates that of the 32 ESG data points asset managers are required to report under current proposals, just eight are available today.
The EU is aiming to solve this problem by imposing new obligations on companies as part of its review of the Non-Financial Reporting Directive, which governs sustainability disclosures. But this may not be finalised in time for asset managers’ first detailed ESG reporting deadline in 2022.
Another challenge is the lack of alignment between the reporting requirements and the EU’s taxonomy regulation, the flagship classification system on what counts as green investment, which effectively obliges fund groups to make two separate sets of ESG disclosures.
Mr Tayler says asset managers will learn by doing and will evolve over time to meet policymakers’ high expectations.
However, a bigger long-term question is whether the disclosure regulation will truly be effective in stamping out greenwashing and channelling money to sustainable economic activities.
Victor van Hoorn, Eurosif executive director, says much will depend on whether investors read the disclosures and the extent to which regulators vet them. The financial regulators in Europe’s two largest fund hubs, Luxembourg and Ireland, have indicated they will allow asset managers to self-certify they comply with the rules.
Given that the EU regulation does not impose minimum standards for ESG funds, “it could actually make it more difficult to spot the asset managers that are good at ESG”, he warns.
This is a view shared by the French financial regulator, the AMF, which recently started to require local funds to comply with minimum thresholds in order to market themselves as ESG.
The watchdog wants to see similar rules introduced at EU level to safeguard investors and protect the credibility of ESG investing. It is also calling for EU-wide oversight for ESG data and rating providers, which have come under fire over their inconsistent methodologies. “We feel that this issue, which is directly linked to greenwashing, is not yet addressed by the [forthcoming] EU regulations,” says Robert Ophèle, chairman of the AMF.
Nathan Fabian, chief responsible investment officer at Principles for Responsible Investment, says that with the new ESG rules, investors can judge for themselves how sustainable a fund is and act accordingly. However, he adds that “if money doesn’t start to be redirected, governments won’t have much choice” but to introduce minimum standards.
Given the net zero emission targets that many countries have set themselves, they are likely to impose more binding rules in future to ensure financial products are aligned with sustainability goals, he says.
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