The fund management industry can counter reputation risks posed by the increasingly complex regulatory requirements for sustainable investments with a bigger effort to boost investor education, a top executive at the Association of Luxembourg’s Fund Industry, Alfi, said on Tuesday.
Regulatory complexity makes it difficult, in particular for retail investors, to understand what’s required, leaving the industry open to possible greenwashing allegations. To address this, Alfi chairperson Corinne Lamesch said the funds business needs to pay make a bigger effort when it comes to investor education.
“Let’s really be honest. This will not be an easy exercise for those who are going to sit in front of the client,” Lamesch told an audience of about 250 delegates during the first day of the association’s Global Distribution Conference.
“We need to complement our sustainable finance ambitions with investor education. We all have a role to play here because the investor is still very far away from what we’re trying to achieve here.”
‘Best intentions’ not enough
“We can come with the best possible intentions, but those additional ESG disclosures will be very difficult to understand by the end investors,” Lamesch said. “We also know that there are still issues of interpretation of the new regulation and that in turn again leads to a non-harmonised implementation of the sustainability disclosures.”
“We know that this in turn will lead to greenwashing accusations. And this will lead to concerns and reputational risk for our industry. So I think honestly, the best intentions will not help investors meet sustainable and social objectives,” she said.
The European Union recently forced the industry to start asking retail investors for their sustainability preferences. This means that any investment firm in direct contact with investors needs to discuss ESG preferences and offer them an opportunity to adjust their investments accordingly. A range of additional requirements will be added in the coming years under the Sustainable Finance Disclosure Regulation, or SFDR, and the EU taxonomy.
Updated guidance awaited
Others in the investment community, including pension funds and other investment industry groups, have in recent months also voiced their concerns over the complexity of the EU’s sustainable finance rules. The industry is still waiting for the European Securities and Markets Authority to update its guidance.
Wednesday’s panel debate at the Alfi conference on how asset managers should reconcile the regulations made clear that the industry is keen to receive that additional guidance from Brussels. However this is unlikely to materialise in the near future because EU authorities are also waiting for input from UK regulator FCA on the EU’s sustainable finance approach.
At Schroders, head of sustainability Europe Nathaele Rebondy agreed with Lamesch on the need to educate investors. “There is a need for a lot of education. We tend to think about sustainability in a more emotional kind of way. The regulation framework is kind of disconnected from that. This also poses personal challenges. We see that for example with nuclear energy.”
Different levels of engagement
Julia Sauer, senior structuring professional at Partners Group, sees different levels of engagement among investors. Some are pushing hard for a sustainable portfolio, while others take a wait-and-see approach. “This will stay a very challenging and evolving topic. Regulation will continue to be amended, with further clarifying statements as we make more baby steps to make sure you get there.”
Referring to the lack of reliable reporting data, PWC partner Geoffroy Marcassoli, sustainable finance, said he sees a “risk of mismatch between expectations of investors and that what managers can report.” Although it remains to be completed, he said he firmly believes in the potential of the EU’s taxonomy framework as opposed to the classifications like Article 8 (‘light green’) and Article 9 (‘dark green’) under the SFDR.
“Personally I believe in taxonomy framework,” he said. “We will need to go through the taxonomy extension. It can be the best framework for sustainable products.”
In terms of upcoming regulation in sustainable finance, the EU’s SFDR took effect in February last year but the more stringent “level 2” SFDR framework, with mandatory auditor reviews of funds, will be in place from January next year. Requirements for investors’ sustainability preferences took effect in August of this year, while under the AIFMD directive, sustainability rules will be defined for alternative investments.
Meanwhile in Luxembourg, financial regulator CSSF has set a 31 October deadline for the industry which requires all regulated funds to update their sustainability documentation.