Discover more from ESG on a Sunday
Week 8: ESG in Europe 🇪🇺
In this issue: ▸ Clubhouse session this afternoon 👋 ▸ Europe united or divided? ▸ A few ESG lights in the dark ▸ A re-purposed dish ▸ ESG in France, Germany, Netherlands, Nordics and the UK
I hope everyone is well and ready for this edition of ‘ESG on a Sunday’!
This week we take a look at ESG in Europe. Or let me put it this way: We take a look at parts of Europe. I will explain what I mean shortly.
Clubhouse session this afternoon 👋
But first, this week I want to invite all of you to join me for an informal session on Clubhouse, the social audio platform, later today at 5pm CET / 4pm GMT / 11am ET.
Here, you can listen or join the talk as my friend Jonathan and I talk about the content and topics of this newsletter. Here’s the link to the session (you need to create an account first, if you don’t have one):
ESG in (part of) Europe
When I started looking at the ESG landscape in Europe, I felt at first that I wouldn’t be able to do it without deep biases. I even considered dropping the entire piece because of that.
I’m European, born and bred in Europe, working most of my life in Europe. I’ve visited other continents frequently, but it’s always been temporary, always coming back to Old Lady Europe for yet another day or month or year.
However, being European is a tricky business, even when you try really hard. National identities within Europe are dominated by big differences, divisions as well as resemblances.
Once, many years ago, I met a man in Asia who described Europe as “an old wealthy family of siblings and relatives, with some servants in the Eastern quarters, continuously squabbling about inheritance and old glory.”
A telling description or just a strong opinion about what was once the cradle of Western civilisation?
Europe united or divided?
I spent some time reading about what Europe is, mostly to understand if the historical complexities of Europe – and there are many – have any implications on the developments within ESG in the different parts of the old continent.
Is it possible that the fires of ESG have lightened Europe as a whole, or are we just talking about parts of Europe?
Before commencing on our ESG journey around Europe (a continent divided and united, shattered and splendid, beautiful and ugly) let’s have a look at some facts:
Europe is the world's second smallest continent
There are 50 countries in Europe (the number varies depending on different definitions)
27 (down from 28 after Brexit) of the these are members of the European Union
On 1 January 2020, the population of the European Union (EU) with its 27 Member States was estimated at 447.7 million
But this is only EU – the total population in Europe (my Europe) is 747,935,084, to be very precise
The European population is equivalent to 9.78% of the total world population
Of this, 293,013,231 lives in what is referred to as Eastern Europe
I think you get the picture.
To answer the question about ESG in Europe, we need to start with the division between what is happening in the Western part of Europe and what is not happening in the Eastern and, to some degree, the Southern part of Europe.
When I embarked on my digital research journey across Europe, some clear characteristics emerged along the way. ESG as a concept (or as a way of investing, or as a way to transform) has no foothold in Eastern Europe.
It takes time for this to sink in, but ESG is entirely a Western Europe thing. And to be even more precise: Even within EU, Eastern members states look like question marks when ESG comes into play.
I tried really hard to find key ESG developments, market data, players, practices, AUM growth in Bulgaria, Romania, Slovenia, Croatia, Poland, Slovakia, Czech Republic, Hungary, Latvia, Estonia, Lithuania, all the way to Greece. They are all members of the EU. And, you know, there’s the EU taxonomy, TCFD rules coming in soon, decarbonisation, stranded assets and so on.
These countries all have pension systems, central banks, treasuries, asset owners and asset managers.
The result? Well, there’s not much to tell.
The question, given this very limited uptake on ESG, is how EU will manage to transform into “EU 3.0” where, according to the European Parliament and Commission, sustainable investments are one of the cornerstones?
A few ESG lights in the dark
Despite the limited uptake, some things are of course happening in those parts of Europe. Here’s an overview of the positives I found:
Poland is one of the countries trying to address sustainable finance – read more here
In Romania, there has been some very recent, initial steps on sustainable finance – more here
In Greece, a first “Greek ESG Transformation Fund” was launched not so long ago (read more here), and here’s one of the few presentations available of the status of ESG in Greece. Also, in Greece as well, the Athens Exchange Group has launched an ESG Reporting Guide.
One of the few very interesting publications I came across is on sustainable banking in Estonia. Very insightful and a lots of information. Read here.
And another positive surprise: Lithuania is aiming to become the regional centre for green and sustainable finance. Why that is the case, you can read here.
Apart from that, there’s not much to tell. But it says a lot that most of the available information you can find comes from various EU-driven public fund initiatives related to energy transition.
All in all, it’s a worrying picture, one we usually don’t think of when we read articles like this one about how “Europe 'turns a corner' on sustainable investment as 45% of assets employ ESG strategies”.
Or this one, where ESG funds are forecasted to outnumber conventional funds by 2025.
Can I offer you a re-purposed dish?
While big parts of Europe are thus lagging behind, the picture is very different elsewhere on the continent. Now, let’s turn our attention towards those areas and take a look at the key ESG characteristics of the ESG wizards in the Western parts of Europe. They come with some rather interesting tweaks.
One of the tweaks is this one. It’s a word, a nice word, and it’s called re-purposing.
If your old IKEA sofa is fading and missing a leg, you can re-purpose that sofa to be an artistic flower holder, and a sustainable one at that...
ESG in Western Europe has come into this stage of re-purposing.
In 2020, re-purposing helped push European sustainable AUM to €1.1tn.
But what does it mean? Well, it means that you add some ESG information, you boil it in corporate governance data and add some collective engagement ingredients. Then you serve it as a climate broth, not a spicy, but a medium dish. A dish which must be served very cold.
This dish then certainly qualifies under article 8 of the EU taxonomy.
The primary markets may be just the same, but by re-purposing you make them look very different.
If by 2025 most of the funds in Europe will be ESG compliant, this means the primary markets they invest in will have follow suit.
So, corporates better be prepared to re-purpose their business models – which by the way are currently on a 3-4 degree climate trajectory...
So what are ESG characteristic of some of the leading Western European ESG markets and who are the ESG “premier league players”?
France – an ESG revolution in the making
In France, you find a clear voice and firm legislative initiatives to institutionalise ESG across the entire finance sector. There’s a heavy environmental engineering tilt in the quest for investment solutions.
It’s an advanced, confident, large market with many very advanced ESG premier league players on both sides of the asset fence, i.e. owners and managers. None mentioned, none forgotten.
France has an imperial position in the current ESG landscape given a structure that supports the ESG efforts. And with the UK out in the cold, France is a clear ESG power player.
The ESG approaches that are applied are mostly integration and exclusions (apart from nuclear). And in France, both money and minds are spent on ESG innovation.
The social focus (the ‘S’) within ESG has so far been in the background, but that will change after COVID-19.
Germany – an awakening giant
Germany is a fixed income heavy market which is very environmentally conscious. It’s been slow from the outset. It’s growing slowly, but steadily.
The country is still divided between hard-core ethical approaches and ESG integrated investing. The Germans are looking for evidence and searching for structure. You find many exclusions and no-no’s. And a substantial trust in ‘labels’ (ethical investment labels).
The E is the main focus. In Germany, you’ll find a climate-issue dominated integration across various initiatives, all supported by a strong environmental momentum in the country.
At present, there’s a limited number of German players in the ESG premier league, but those who are there are doing well. However, innovation is not a priority.
Netherlands – place of innovation
If you think of innovation in the ESG space – across all elements of ESG – you can find it in the Netherlands. It’s a small market, but it has many ESG premier league players.
Netherlands is daring, experimental, yet has very advanced ESG approaches both on asset owner and asset manager side.
The transparent and truly committed ESG approaches in the Netherlands are in many areas showing how things can be done, combining the entire spectrum of ESG issues in the investments.
Climate is of course in focus, but this is one of the markets where both S and G are neither forgotten nor marginalised.
You can really find ESG inspiration in the Netherlands.
The Nordics – mature, dynamic and complex
The Nordics are, of course, not a single country. There are similarities between the Nordic markets, but there are also important differences.
Sweden was the capitol of early ESG efforts, and it has one of the most matured retail and institutional ESG markets in the world, on both sides of the asset fence.
Many early ESG approaches in the world have been applied and tested in Sweden.
Many Swedish asset owners and asset managers have been at the forefront of action on institutionalising ESG – and have done a good job.
Nowadays, Sweden is living a bit on the fumes of the country’s past successes. As the market has matured, innovation is no longer the main focus.
Sweden only has a few ESG premier league players, mostly on the asset owner side of the fence. But those who are there are really good.
Denmark is ‘different’. The market is still growing, and here you find many interesting ESG solutions that are not just replicas of the ‘old’ Swedish ones.
Denmark arrived a bit late in the ESG game compared to Sweden, but lately Denmark has showed more innovation, mostly in the asset owner space with innovative climate smart pension solutions.
Denmark has jumped the entire ethical investment trend in the Nordics and dived straight into the ESG integration. Some of it, it must be said, may lack deeper S insights, but developments are promising in Denmark.
Norway is Norway. Deeply troubled, almost paralysed by the enormous wealth the nation has created through extraction of oil and gas, Norway has gone its own course on ESG.
It’s more of an ethical or moral course, driven by exclusions and featuring sporadically confusing approaches (“no to coal, but yes to more oil”), yet very firm once the approaches are implemented.
Norway has one truly huge international ESG premier league player – and they know it. Norway is about doing the right things, more than it’s about innovation.
Finland. Full stop. A country that is not as vocal, not as loud as Sweden. Not as different as Denmark. And not as puzzled as Norway.
Finland has a big environmental focus, and here we find a quiet, steady development. It’s not about fuzzy words or concepts, and they don’t do much on the broader spectrum of ESG. But what they do is thorough.
It’s a “what get measured gets done” approach, and Finland has some very good, but small players. One or two of them could qualify for the ESG premier league, but they would never brag about it.
The UK – a governance beacon
UK is of course no longer a member of the EU, but it has a huge ESG market on both sides of the asset fence.
The UK market was maturing just before Brexit, and it offers various ESG approaches, some of them very innovative, some very “re-purposed”.
Here, you find many strong and clear voices, especially on the climate side of ESG as well as the policy advocacy side where the UK is a true leader.
ESG governance has its pedigree in the UK more than anywhere else. It really matters, and this governance is widely applied and well-embedded in the way some of the leading players develop investment solutions.
The UK has a confident ESG market, but it is still only a fraction of the investment market that is taking part in the ESG revolution.
The ESG approaches vary a bit. There’s a more moderate application of exclusions compared to other markets. You do find some innovation here, and there’s plenty of ESG products. You can say that the market offers a variation of similar approaches.
The UK is the home-turf of a number of international ESG premier league players with attitude. And, as we know, your attitude determines your latitude. Some of the UK players fly really high...
The UK is unclear about how much it wants to control the ESG dominion in Europe. It certainly has the muscles to do more than it does, but it lacks a clear vision of what to do with it.
That’s all for now. Have a great week!
Kind regards, Sasja