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Cyprus 4.0: ESG emerges in Cyprus

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Marios Tannousis is Deputy Director General of Invest Cyprus, board member of CIFA, and a board member of EFAMA. He has many years of experience in financial services, including 12 years at Societe Generale Group where he served at various key posts.

As per MSCI the  leading international provider of critical decision support tools and services for global investment community, the practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime.

For Tannousis, the discussion of ESG in  Cyprus began in 2016, when the UN Paris Agreement was signed by world leaders in 2016, after the UN adopted their Sustainable Development Goals (UN SDGs). It has then gained  momentum in the financial services and  asset management industry, arising from  investor demands and  regulatory pressure for sustainability or environmental, social and governance (ESG) practices, and more importantly  due to the pandemic of COVID-19. The current COVID-19 pandemic has reinforced the need to redirect capital flows towards sustainable projects in order to make our economies, businesses and societies, in particular health systems, more resilient against climate and environmental shocks and risks with clear co-benefits for health.

As per Peter Young, Chair of the Sustainable Finance Technical Committee TC / 322 in tackling climate change, poverty and inequality requires an innovative financial system. In an interview with ISOfocus, Peter J. Young, puts a compelling case for why International Standards are essential for mobilizing finance globally to address these environmental and social imperatives and ensure future prosperity for future generations.

At the EU scene the  European Commission for this purpose  has issued regulations that affect every  type of asset manager and investment fund, as well as other  financial services firms. Asset managers need to satisfy regulatory and investor demands to change the way they invest and report, and the products they offer.  The Sustainable Finance Disclosure Regulation (SFDR) imposes mandatory ESG disclosure obligations for asset managers and other financial markets participants with substantive provisions of the regulation effective from 10th of March 2021. The SFDR was introduced by the European Commission alongside the Taxonomy Regulation and the Low Carbon Benchmarks Regulation as part of a package of legislative measures arising from the European Commission’s Action Plan on Sustainable Finance.

“As a consequence of the above, the discussion around ESG in Cyprus really took off, with the financial regulators  some financial services organizations and banks taking part along with some  investment  funds in the debate and in preparing comply with the EU directives but also to apply effective policy making and create awareness for this important matter. The interest in ESG has grown since then with Investors, Asset Managers,  major banks and other financial services organizations beginning to look  at  the ESG contribution or disclosure requirements. We are, perhaps, a little bit late with respect to other major EU Countries  but we are catching up steadily,” Tannousis explains.

We need  to take a few new and important steps here in Cyprus, as per the EU and international trends regarding ESG.

The Government is committed to the UNSDGs  and is working to   apply sustainable-finance criteria in policymaking.

The EU  has moved quite dynamically on the issue while at the international level the world  leading authority on standards, the International Standards Organization (ISO)  is going to publish the standards for sustainable finance before the end of 2021.  Cyprus participates actively and contributes both at EU level as well at the  ISO consultations.  Once they are finalized, the standards will be  communicated to the appropriate agencies at all countries. This guidelines are published and are used both by the governments and for the private sector. This will give the government and the private sector  a reference  to guide policy making, and this will be a key step in increasing the importance of ESG across the public and private sectors as well as into the society.

We also need to educate the public, we need more and more ESG education, on the importance of ESG. This should start right in the primary school,  and continue through high school and tertiary education. Then, companies also need education in this area, and not just in the banking and financial services sectors, but also right across all other sectors.”

Nonetheless, we are seeing increasing investor demand for ESG conceptualized  projects, because some consider the  ESG principles quite important, Tannousis notes.

“Since ESG is driven from investor demand as well from regulations, it obliges the makers and developers of projects to integrate the ESG concept into their projects.  We, at Invest Cyprus, have created a “Project Bank,” a data bank called “Tourinvest” with an array of  projects and attractive investment opportunities that are open to investment and we promote these projects to foreign investors  while we are also in direct communication with the project owners in an effort to attract foreign  investment in these projects. We share our  foreign investment experience with the project owners so that  they can adopt all the tools needed to make their projects ESG sustainable and attractive to the foreign investors.

We strongly believe that this ESG  trend will continue. We have grown to accept stakeholder capitalism: As little as 10 years ago, businesses were only thinking about making as much money as possible, that is profit centered. But the pandemic has raised consciousness in business and finance that we have to do more – business must do its best for the communities it operates in, and support sustainability.”

Financial services organization,  Banks  and Investment Funds  need to  begin  to incentivize ESG investment projects, Tannousis notes.

“Banks or Funds  can perhaps consider providing   incentives for ESG projects to make them more attractive to investors. They can for example offer particularly low interest rates on ESG projects, and better terms  for loans of such projects. Where usually the interest rate on the loan or financing might be  3% or 4%  per cent, if it’s an ESG project, the bank can perhaps grant the loan at a much lower rate. This is an example of how to incentivize and push ESG projects on the financial services side.

Tannousis, who works extensively with foreign investors interested  to invest in  Cyprus, notes that there is considerable interest in ESG investment projects.

“Foreign investors are more and more looking into to ESG funds, and ESG investments. Some investors tell us  that if it’s not ESG classified, or if it doesn’t have an Ecolabel they are not going to invest. We see this from investors all over the world – an increasing demand for ESG-conceptualized investments and projects.

Because ESG, after all, serves to implement the UN Strategic Development Goals and  the government of Cyprus is committed to implementing them as well, and is moving in this direction  which definitely helps to  encourage ESG investment.”

The Cyprus Securities and Exchage Commission (CySec), which is the National Competent Authority and regulator for Investment Funds, Investment Firms and Asset Managers   has already enforced the EU directives regarding ESG, Taxonomy, SDFR while more regulations are in the pipeline to be enforced.  The largest investors into  Cyprus, big investment funds, investment  banks, big corporates, investment groups and family offices sooner or later will need to engage in  process of making ESG a strategic priority, according to Tannousis.

“You have to bear in mind that broad discussion of ESG, in business and finance, started fairly recently and has been accelerated during the Covid-19 pandemic. If you consider the speed at which it has become integrated into the strategy of major organizations and corporates all over the globe is quite impressive. But most companies are still at the stage of exploring how to combine these values with practical business, and that is not an easy challenge to take up. There will still be a lot of thought leadership debate and presentations of different aspects of ESG. And I think we are going to be seeing it more and more in the media and in boardrooms.” You will hardly find nowadays  an international conference, symposium,  or convention  in  Banking, Financial Services,  Investment Funds, Asset Management  or on any  Investment related matter  globally or at European level that does not have as one of its major themes ESG and sustainability.

What about retail investors in Cyprus?

“At Invest Cyprus we  are mostly in touch with  institutional investors, of course – usually  we do  work directly with retail investors. But I can tell you that, at the retail level in Cyprus and abroad, individuals are also much more aware now of the benefits of ESG than they were aware a few years back. It is beginning to raise the consciousness of everyone in business world but also in society especially in the younger generations.  Retail investors here who have funds to invest personally, and who are searching for yield are looking more and more into sustainability. Transparency, Governance with best practices, respecting the Environment, are key issues that cannot be overlooked. So it’s happening both at the corporate or institutional  level and at the retail level” While there is still  a debate going as to the readiness of some companies to report to investors in the detail required by the EU’s proposed disclosure requirements mostly because of issues having to do with the provision and availability of data the route is one way” It is definitely getting harder and harder for ESG to be ignored. Companies with an ESG label will tend to have a higher valuation and low cost of capital.  Tannousis concludes.

 

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