Governments should consider green investing incentives, says IMF

In its semi-annual Global Financial Stability Report, published on Monday, the IMF said that an additional investment of as much as $20tn (£14.7tn) over the next two decades will be required to facilitate a green transition. Alongside this, a mainstreaming of green fiscal policies and greater industry efforts to overcome greenwashing will be required.

The IMF recommends that policymakers should tighten ESG data and disclosure standards, ensure proper regulatory oversight to prevent greenwashing, and consider incentives, including financial enticements, to encourage flows into “transition-enhancing funds”.

In a blog post accompanying the report, IMF officials Fabio Natalucci, Felix Suntheim and Jérôme Vandenbussche said: “Even though sustainability is becoming mainstream in investment strategies, sustainable investment funds still represent only a small fraction of the investment fund universe.

Even though sustainability is becoming mainstream in investment strategies, sustainable investment funds still represent only a small fraction of the investment fund universe

Fabio Natalucci, Felix Suntheim and Jérôme Vandenbussche, IMF

“At the end of 2020, funds with a sustainability label totalled about $3.6tn, representing only 7 per cent of the overall investment fund sector. Funds with a specific climate focus accounted for a meagre $130bn of that total.”

This comes after a series of calls made ahead of the COP26 summit to improve the financial sector’s efforts against climate change.

In September, the Work and Pensions Committee called on the government to use COP26 as a catalyst for change within the pensions space, and to seize the opportunity to make the UK’s pensions industry a world leader.

In July, a Pensions Expert podcast discussed whether the pensions industry needs an “investment rethink” to grapple ESG commitments.

Bolster green inflows

Efforts to encourage more flows into sustainable funds must come from the top down, the IMF has said, despite the rising trajectory of both the number of funds and the value of assets under management.

In a sample of more than 36,500 funds, active as of the end of 2020, about 4,000 had a sustainability label, of which nearly 1,000 had an environment theme, while only slightly more than 200 had a climate-specific theme, the IMF stated.

To encourage increased flows into these products, the IMF suggested that governments provide incentives to channel savings, including pension pots, towards transition-enhancing funds.

Such tools could take the form of enhanced eligibility of climate-themed funds for “favourable tax treatment”, or conversely, a carbon tax could be applied on funds that do not meet environmental benchmarks.

The IMF noted efforts undertaken in Luxembourg to introduce a tax incentive to promote sustainable investments. Under that model, the annual basic subscription tax rate of 0.05 per cent of net assets under management can be cut to 0.04 per cent when the fund invests at least 5 per cent of its total net assets in sustainable investments.

The rate applicable to sustainable investments is then reduced to 0.03, 0.02, or 0.01 per cent when sustainable investments exceed 20, 35, or 50 per cent, respectively, of the total assets of the fund.

The report noted that additional research will be required to understand the optimal design of any incentive.

Data central to confidence

Efforts must also be made to address shortcomings in sustainable information architectures, including ESG data and disclosures, the IMF said.

It recommended that a better classification system for funds, where labels and taxonomies are uniformly used and understood, would help to summarise a fund’s investment strategy and its overall approach to engagement and stewardship.

Prior IMF analysis revealed that labels have become an increasingly important driver of fund flows — especially in the retail segment of the market.

To encourage this, the IMF, along with the World Bank and the OECD, intends to develop principles for its own classification systems to “harmonise existing approaches and support the development of sustainable finance markets”.

Policymakers also need to do more to improve market confidence amid concerns over greenwashing, the report stated, adding that governments need to introduce “proper regulatory oversight and verification mechanisms” to negate the risk it poses.

It added that greenwashing is a barrier to further inflows into sustainable funds but efforts such as the EU’s Sustainable Finance Disclosure Regulation were effective in providing investors with credible and reliable information.

Stewardship central to efforts

The IMF report also outlined the benefits of increased volumes of effective stewardship that come alongside the scaling up of transition-enhancing funds.

In a study of the proxy voting behaviour of funds in the report’s sample, support for climate-related shareholder resolutions has trended up over time, indicating that investors are increasingly taking climate-related issues seriously. This support has been significantly greater for sustainable and climate funds than for conventional funds.

However, concerns around the burden of stewardship demands on trustees have recently been raised.

In September, Pensions Expert reported that asset managers were falling short of their stewardship commitments.

Only 44 per cent of asset managers who stated that they had a stewardship and voting policy that covered all their assets under management voted on all resolutions, research by Redington found. Almost 10 per cent did not exercise any voting rights at all, while a vast disparity in the quality of engagement between asset classes was also identified.

Also in September, it was revealed that one in three applicants to the revamped UK Stewardship Code did not meet the required standard. From 189 applications, which included 147 asset managers, 28 asset owners including pension funds and insurers, and 14 service providers including data and information providers and investment consultants, only 125 organisations made the final list.