Author: Universal Investment– universal-investment.com
ESG regulation is growing in complexity. For investors, identifying potential ESG issues related to their investments and classifying them in a comparable manner across asset classes and investment vehicles is becoming crucial. Moving on from current approaches to ESG reporting, real-time analysis is one way to integrate sustainability risks and identify opportunities in order to make impactful investments.
According to ECB data, private and institutional investors a aain the European Union and England have invested a total of 13.6 trillion euros in investment funds. Germany is the largest market for UCITS and AIFs, with assets of 3.2 trillion euros. This corresponds to a share of 23 percent of the European market.
Against the backdrop of increasing regulation in the ESG sector, it is becoming more and more important for institutional investors to maintain a precise overview of their investments. However, conflicting ESG ratings and a host of different approaches to scoring a company or an investment on environmental, social and governance criteria make it difficult for investors to compare results. On top of this, institutional investors, such as pension funds, also need to be able to provide documentary evidence that their investment approach and implementation are in accordance with their statutes and their stakeholder’s wishes.
This is where Universal-Investment steps in as a fund service platform and Super Management Company. Universal-Investment’s ESG reporting allows for comparisons to be made, for example across different fund vehicles. As a full service partner, Universal-Investment offers institutional investors and asset managers efficient administration as well as solutions for structuring their funds, securities and alternative investments, complemented by state-ofthe-art risk management. A capital management company that purely specialises in the administration of special assets, the so-called Master-KVG is independent and can connect specialised asset managers and advisors. The Master-KVG is able to implement sustainability criteria in all asset classes, from securities to alternatives to real estate. Universal-Investment acts as a responsible trustee and since innovation has always been part of the company’s DNA, Universal-Investment takes the lead on issues that affect its clients, such as the integration of sustainability risks.
Sustainability risks – the framework
“Sustainability risk” is defined as an environmental, social or governance event or condition that if it occurs could have a negative material impact on the value of an investment. Sustainability risks are not defined as a new risk category, rather as a factor of existing risk types, like credit risk, market (price) risk, operational risk, strategic risk or reputational risk. This is due to the nature of sustainability which impacts have already been taken into account in the past by implicitly considering material risk factors when assessing a potential investment. Sustainability risks can be divided into physical risks and transition risks. Physical risks arise, for instance, as a result of climate change and environmental conditions like heatwaves, storms or other extreme weather events that may directly affect companies’ operations. Transition risks may arise as a result of the transition to a low-carbon economy when, for example, emission certificates that may be crucial for a company’s operations become more expensive due to scarcity. If these sustainability risks materialise, they have a significant effect on existing risk types. For example, if a pension fund is invested in companies whose operations might be affected by regulatory changes, these investments might become so-called stranded assets that suffer unexpected declines in value.
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