ESG integration in Poland is nascent, with consumer demand for sustainable products yet to gain momentum

In collaboration with the Chamber of Fund and Asset Managers, CFA Society Poland, an association of investment professionals holding the global CFA designation, has released Poland's premier study on the adoption of ESG criteria by Polish investment fund companies (IFC). This survey engaged eighteen IFCs to explore the depth of ESG incorporation into their operations in 2023. This analysis is a pivotal step in delineating the stance of Polish investment funds within the sustainable finance landscape, highlighting potential advancements that could expedite the market's shift towards sustainable and responsible investment practices.

• 94% of surveyed IFCs acknowledge the establishment of an ESG strategy in alignment with the 2019 European Parliament regulation.
• Almost 40% of executive boards have not delineated ESG-oriented strategic directions for their organizations.
• Approximately one-third of IFCs perceive a minimal reputational risk when excluding sustainability criteria from their investment decision-making process.
• Investment constraints, negative selection, and ESG metrics emerge as prevalent considerations in incorporating sustainability factors and risks.
• Over half of the IFCs declined investment opportunities in securities due to the issuer's inadequate ESG management.
• 44% of IFCs report that their fund participants anticipate minimal integration of sustainability factors in the investment process, with 28% of firms completely unaware of their clients' sustainability preferences.

Titled "Pragmatism or Ideals? ESG in Polish Investment Funds," this comprehensive investigation provides the first in-depth look at Poland's "sustainable" investment landscape. With the Chamber of Fund and Asset Management's support, it was feasible to scrutinize the environmental, social, and governance strategies of asset managers overseeing assets exceeding PLN 100 billion.

The significance of ESG criteria is on the rise, yet the journey towards comprehensive integration remains challenging.

Polish IFCs are gradually embedding ESG factors into their operational and investment fund strategies. However, the process is still in its initial stages, with the scope and nature of considered factors and the applied methodologies varying significantly across funds and management companies. The availability of sustainable investment funds compliant with the EU's Sustainability Disclosure Regulation (SFDR) is currently limited, accounting for a mere 3% of the total fund offerings in Poland.

Conversely, the application of ESG considerations in investment processes appears more advanced. Despite generally employing simplified methodologies, all surveyed entities have adopted practices enabling ESG integration into their investment strategies.

"We are optimistic that the number of 'green' funds will soon rise in Poland. Currently, there are 58 ESG funds with a combined value of PLN 6.5 billion. The availability of foreign funds meeting ESG criteria is significantly higher, with about 300 such funds available in our market. Globally, the asset value of ESG funds is estimated to exceed $2.7 trillion," states Małgorzata Rusewicz, President of the Chamber of Fund and Asset Management.

The Polish investment sector faces considerable challenges, including a lack of comprehensive data, suitable tools, and standardized market practices.

"Developing robust methodologies that blend traditional financial with emerging non-financial data presents challenges, partly due to restricted access to certain non-financial information. Nevertheless, with the upcoming Corporate Sustainability Reporting Directive (CSRD) requirements, we anticipate improved data accessibility and enhanced competency in data interpretation and comparison within the next 2–3 years," adds Krzysztof Kaminski, Chairman of the ESG Committee at CFA Society Poland and Board Member of Millennium TFI.

The preliminary nature of sustainable strategy adoption in the Polish market is also highlighted by the fact that regulatory compliance is currently the primary motivator for IFCs to implement ESG strategies, indicating a predominantly pragmatic approach to sustainability. The integration of ESG into strategic planning or the pursuit of environmental objectives remains a lesser priority for most Polish IFCs.

IFCs show limited concern over reputational risks, and clients show lukewarm interest in sustainable products.

A key finding of the "Pragmatism or Ideals" report is the general indifference of Polish IFCs towards reputational risks associated with neglecting sustainability factors in investment strategies. These entities largely overlook client expectations for sustainable investment practices and do not consider ESG as a significant factor influencing their brand and image. While most IFCs have no plans to launch new green funds, they instead focus on transitioning existing funds, influenced by the motivations outlined earlier. Consequently, ESG remains a niche area in Poland, surprisingly not garnering significant interest from clients, despite roughly 50% of retail and institutional investors expressing expectations for sustainability considerations in investment processes. The survey also reveals a communication gap between asset managers and their clients, with 28% of IFCs lacking any insight into investor preferences for sustainability.

"One notable insight is the prevailing belief that Polish clients do not demand 'green' products. Fund managers emphasize regulatory obligations and their companies' internal strategies, yet the client perspective is often missing. It is anticipated that the industry will eventually evolve to where most portfolios comply with ESG standards, but without client-driven demand, progress will be slow. Similar to how consumers consider the energy efficiency of household appliances or the environmental compliance of vehicles, there should be an emphasis on the environmental impact of investments. The industry must intensify its efforts to persuade clients of the importance of this aspect. Particularly because focusing on long-term environmental considerations aligns with extending investment horizons, thereby fostering greater volatility tolerance," concludes Bartosz Pawłowski, on behalf of the CFA Society Poland's Board of Directors and its Vice President, by day serving as Chief Investment Officer and Vice President of the Board at mTFI.