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What's In A Name?

Driven by a broadening spectrum of investor preferences, the financial markets are increasingly fragmented. In The Coffee Analogy (2022), it was anticipated that investment funds would follow a product development pattern akin to the ‘second wave of coffee‘ in the 90s and provide a widening choice of ‘flavors’ for investor-customers.


In ESG: From Process to Product(2023), G. Serafeim proposes a possible taxonomy of ESG investment products summarized in the orange section of the table below – like a menu hanging behind baristas.


In the green section, I have added a translation of ESG investment strategies into traditional investment styles for those dreading the appellation ‘ESG’ like He-Who-Must-Not-Be-Named.’


To cap this exercise, two columns in blue were included to link directionally each strategy identified by Mr. Serafeim to the classification used by the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the UK’s Sustainability Disclosure Requirements (SDR).


Note that the SEC plans to rely on the 'Fund Names Rule' to tackle this product classification challenge, with the so-called ‘80% rule’ that states that investment funds whose names suggest a focus on a particular type of investment to adopt a policy to invest at least 80% of the value of their assets in those investments - an audacious attempt to simplify a complex topic. Good luck!


How fast-growing, broad, and price-sensitive each ESG market segment will be is yet to be determined. But it is already sensible to expect that firms across sectors and regions that supply securities to the financial market will have to thoroughly rethink their strategy, operational model, and relative equity positioning to maximize their appeal to investors.


Because the customer (investor) is always right!

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