The European Securities and Markets Authority (Esma) is aware that the asset management industry is under pressure to meet green investing rules and is preparing to present detailed guidance shortly. It understands that the rules are complex, often incomplete and that the deadlines are tight, but believes this is ultimately worthwhile work. “The complexity of this is quite astonishing,” one of its officials acknowledged at a Luxembourg conference this week.
No investment fund conference is complete without panels using multiple ESG-related acronyms and complaining about the workload. Tuesday’s Cross-Border Distribution Conference, hosted by Deloitte and Elvinger Hoss on the Kirchberg plateau, was no exception. Probably by virtue of this repetition this message appears to be well understood by the regulators.
“The concerns are very familiar to us,” Evert van Walsum, head of Esma’s investors and issuers department said following presentations on this topic by industry figures. He spoke of three aspects that he knows are a particular concern.
‘Difficult to navigate’
“The first is the complexity of the regulation and how it all fits together,” both in terms of the way the texts are drafted and how the taxonomy, SFDR, CRSD and the rest fit together. “There are a lot of cross references, which makes it quite difficult to navigate. The complexity of this is quite astonishing,” he said.
The sequencing of reporting is the second main challenge he said, particularly meeting SFDR requirements before corporations are required to report.
“The reality we have to face is the context of Europe trying to be quick and keep momentum, but at the same time realising that there’s an international arena out there where you have to be aligned,” he said. He noted the importance of the alignment work being undertaken by the International Sustainability Standards Board and European Financial Reporting Advisory Group.
Adding to investor understanding?
Finally, he recognised the problems this complexity has for the ultimate goal of the regulations: helping investors, particularly low-information investors, to support sustainable projects. This is a particular challenge with the coming on stream of ESG considerations into Mifid. “The taxonomy, article nine, article eight, article six… it’s hard to see how the retail investor could follow all of this jargon,” he said.
Yet Van Walsum was keen to stress the context. “It’s so important to see the broader picture and the sense of urgency around this drive to achieve greater sustainability.”
He said the ESAs are motivated “to provide guidance where that is that is possible. But only where it’s possible because interpretation of EU law cannot be done by Esma and the other ESAs, so we work with the Commission in search of greater clarity,” he said.
‘Highly political’
“I can already predict that in a few weeks time you will be getting more guidance from the ESAs on various topics related to the SFDR,” he added.
He also explained the context of this rule setting, saying: “this is a highly political dossier. The European Parliament has a big stake, and aspects such as the principal adverse impacts indicators are under constant scrutiny.”
These discussions have a knock-on effect at the Commission and Esma which have to react to decisions made by politicians. “I think, in the area of sustainable legislation, you need to get used to changes being made more often,” particularly over the taxonomy and the do-no-significant-harm rules.
Rewarding the work of companies that are investing in making big strides towards green transition is also a concern. “The idea is to create multiple taxonomies, as the current taxonomy is more aspirational, the greenest of the green,” he said. “You need to have something in between where you can transition from something that is not green or dark brown even.”
‘Green bleaching’
The conference was also introduced to a relatively new term during the panel discussion: “green bleaching”. Elizabeth Gillam, head of EU government relations and public policy at Invesco said this term has been coined to describe the effect of asset managers understating their ESG action out of fear of the reputational risk from potentially over-promising. It is the opposite of greenwashing.
“The myth of sustainability preferences is that in many cases, it’s a numbers game. You will be measured on what percentage of taxonomy alignment you have,” she said.