Gap between European and U.S. ESG policies persists: Fitch

Regulators in the U.S. and Europe are increasingly taking diverging approaches to environmental, social and governance-based investing, Fitch Ratings reports.

The rating agency noted that, amid increased demand for responsible investment from institutional investors, policymakers in Europe and the U.K. are facilitating the integration of sustainability considerations into investment decisions.

European regulators are also proposing that investment firms be required to consider the ESG preferences of retail clients when providing investment advice, Fitch noted.

In the U.S., the Department of Labor (DOL) has taken a more conservative stance on ESG investing, it said.

The DOL recently proposed rules stipulating that employer-sponsored pension plans aren’t designed for pursuing social goals.

It also proposed restricting pension plans to casting shareholder votes on issues that have an economic effect, “implying they may not vote on ESG-related issues unless they have a measurable financial impact,” Fitch said.

Notwithstanding these increasingly divergent regulatory stances, Fitch said that it expects long-term structural trends to continue favouring ESG investing.

“The shift in social and political attitudes that has fueled demand for sustainable investing is accelerating as investors, public institutions and corporations increasingly prioritize ESG measures as part of their investment criteria,” Fitch explained.

The agency also attributes that growth to “the increased belief that ESG factors can have material impact on long-term investment returns,” noting that Covid-19 hasn’t put a damper on the trend.

“The pandemic has done little to deter the expanding focus on ESG investing, as fund managers increasingly seek to invest in sustainability-conscious assets,” Fitch noted.

The differing policy approaches being taken by Europe and the U.S. “are not expected to immediately affect ratings assigned to investment managers, pension funds and/or the institutions sponsoring such plans,” Fitch said.

Still, “we anticipate they will translate into differing investment considerations, risks and potential returns over the longer term,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.