If Europe’s nations decide to enforce different local guidelines when it comes to the Sustainable Finance Disclosure Regulation (SFDR) it would be detrimental not just to asset managers but also investors, industry insiders have warned.
The SFDR came into effect on 10 March, when asset managers in the European Union had to decide whether their funds fit into one of three categories set out by the regulation, designating the level of sustainable characteristics. But that was only the beginning.
The next stage of the regulation, the level 2 technical standards, will include additional details on what asset managers need to report on and the content and presentation of the disclosed information.
The European supervisory authorities submitted their final report and draft regulatory technical standards (RTS) to the European Commission back in February, however the European Commission still hasn’t endorsed the RTS – a move which is expected shortly. With just six months until the proposed disclosure date, time is running out for asset managers to prepare and there are still many uncertainties that are causing concern.
Potential divergence causes concern
One of the problems is the potential divergence in how national authorities are adopting the standards.
“That’s a very severe risk we’re running here, the simple reason being if there is something coming from the EU and it’s interpreted differently in different countries, how will you be able to actually manage products out of one country and actually sell it cross border into all the different countries?”, said Michael Maldener, a managing director at Nordea Asset Management. “This is basically one of the principles and strong benefits of the European market.”
He highlighted differences already coming out from France, Belgium, Spain and potentially Germany.
Maldener added: “So this kind of patchwork that is currently happening in the market, that is actually a real risk to cross border distribution, because you could have a product or fund domiciled in Luxembourg, but not being sellable in Germany because it doesn’t meet German requirements. This risk of fragmentation is not only a risk for us on the distribution end, but it’s also a risk that could at the end be detrimental for investors.”
At the European Fund and Asset Management Association (EFAMA), Dominik Hatiar agreed.
“We also see challenges in terms of potential gold plating or divergence caused by the national authorities who could potentially apply local guidelines which would result in additional requirements or standards for Article 8 or 9 products,” Hatiar, who’s a regulatory policy advisor, said. “This would be detrimental to the single market, detrimental to cross border distribution of funds. This is why, if there are to be further standards, we clearly advocate that they should be adopted at a European level so as not to fragment the market.”
Delays causing tight timeline
Maldener said Nordea is quite far ahead in preparing for the upcoming disclosures and plans to file their prospectuses, including all the updates, towards the end of the summer.
However, he said that the situation is not ideal because preferably the team would have already had the RTS at this stage to give it more nuanced and detailed guidance on how things should be done.
“We have to bear in mind that we have to have our regulator [the CSSF in Luxembourg] approving all of the implementation and that’s why we actually planned carefully,” said Maldener. “To make sure that we are not actually coming too late to the CSSF.
“We have also further strengthened our internal program including further parts of the organisation and also trying to anticipate, although final regulatory guidance and requirements are not there, we anticipate what might come next.”
Some members of EFAMA have exercised caution in order to avoid reclassifying funds later and incurring further costs, as well as reputational liability and risks. But due to a lack of clarity, EFAMA’s Hatiar thinks, there is still a risk of misclassification.
Missing data problematic
In addition to inherent uncertainties, a lack of data is also problematic for asset managers.
Some of the data to determine whether underlying investments are taxonomy-aligned is currently unavailable.
“What we are asked to do right now is to base it on a data set not available and the accuracy of which will not actually allow for fully-fledged disclosure,” Maldener said. “That is one of the central points of criticism towards the plans, the rollout and the timeline that we have that simply things are not perfectly orchestrated in terms of who is to do what, when and disclose based on which data.”
Maldener thinks it would be wise to have a more phased-in application of the regulatory requirements, to make sure that asset managers have access to the necessary underlying data.
That’s why, in Hatiar’s opinion, it’s crucial that all the data requirements in level 2 are embedded in the forthcoming Corporate Sustainability Reporting Directive, so the information is disclosed by as many companies as possible.