One month after the EU ordered the investment sector to ask clients for their sustainability preferences, investment firms appear to show limited enthusiasm for complying with the new requirements as complexity around the EU’s ESG rules persists and greenwashing fears linger.
Some industry players are compliant but many are still in a holding pattern. EU supervisory authority Esma responded by saying that violating the rules may constitute an administrative offence, maybe even a criminal one.
From 2 August, investment advisors and portfolio management companies are required to collect specific information from their retail clients about their sustainability preferences, and offer them investment products that match their preferences. The requirement came into force as a delegated act that is part of the EU’s Mifid II directive.
Out of a dozen firms approached by Investment Officer in recent weeks, four provided feedback. Robeco and Van Lanschot Kempen, reported that efforts have been made. A spokesperson for one firm asked not to be identified because they had not adjusted their practices yet. Regulators, industry associations and specialist consultants reported a mixed take-up.
‘Waiting to see what others are doing’
“We are observing different responses from financial market participants,” said Pierre Nemeth, chief executive officer at Sopiad, a financial software firm. “Those who want to be compliant as from day 1… (and) those who prefer not to follow…, claiming that an external audit will not be carried out during the first year. They are waiting to see what other players are doing.”
The European Securities and Markets Authority, or Esma, said the industry has no choice but to accept the new requirements. “The provision of investment services in breach of applicable legal requirements is a violation which may qualify as an administrative (or potentially even criminal) offence,” a spokesman said in an email.
‘Large amount of complexity’
The European Fund and Asset Management Association, or Efama, attributed the limited enthusiasm to the complexity of the rules. “There is still a large amount of complexity involved to incorporate investors’ sustainability preferences and many interrelated regulations are still in process,” said Carolina De Giorgi, regulatory policy adviser at Efama.
Esma acknowledged its updated ESG guidelines remain to be published. In April of this year it published a consultation paper about the guidelines. The Association of the Luxembourg Fund Industry has complained about the “difficulties raised by the misalignment of application dates” and asked for “flexibility” in implementation.
Overhauling processes
Complying with the rules means firms need to adjust the onboarding process for new clients and present existing clients with a questionnaire. The process is similar to asking clients about their risk appetite, now common practice across the EU.
“The core question we ask our clients is: Would you like your sustainability preferences to be incorporated in your investment allocation advice?” said Lars Dijkstra, chief sustainability officer at Dutch investment bank Van Lanschot Kempen. “This impacts both our manufacturing as well as distribution role.”
Based on the profiles, advisors can recommend products that fall into different categories under the Sustainable Finance Disclosure Regulation, such as ‘green’ Article 8 funds, ‘dark green’ Article 9 funds, or ‘brown’ Article 6 funds, aligned with the EU taxonomy.
“To comply with Mifid II Robeco contacted its clients per letter to ask them what their sustainability preferences are,” said Masja Zandbergen, head of ESG Integration at the Dutch firm. “We are currently evaluating the responses and assessing whether our offering is in line with the clients preferences.”
Sustainable investments still not understood
Zandbergen said clients still do not fully understand the definition of sustainable investment. “We still see a lot of confusion amongst clients,” she said. “What is an acceptable level of sustainable investment in an article 8 fund? There are questions around the implications of different definitions/thresholds and what the impact on risk/return might be.”
Some industry participants, including Dutch asset manager APG, have argued the regulatory complexity and absence of reliable data on sustainable investments is encouraging greenwashing by turning ESG into a competitive topic. The raid on the offices of Deutsche Bank’s asset management arm DWS in Frankfurt is but one example.
Esma, as supervisory authority, said while the focus in EU sustainable legislation so far has been on disclosures and transparency, a minimum standard for financial products needs to be established to make sure EU regulation cannot be abused.
“While the increased transparency of SFDR is a welcome tool to fight greenwashing (and not to promote it), Esma is concerned that the financial industry is using SFDR disclosures as proxy for ‘sustainability labels’,” Esma said. “Therefore, Esma believes it is necessary to create some minimum standards for financial products to ensure that sustainability disclosures are not misused in this way.”
The availability of reliable ESG data is due to improve in the coming years as the Corporate Sustainability Reporting Directive, or CSRD, requires companies to improve reporting.
Fight against greenwashing
“The CSRD is expected to improve the level of transparency of corporate reporting which will provide a comparable, relevant and reliable baseline for the information flow across the sustainable investment value chain. However, each node of this chain has a role to play in the fight against greenwashing,” the Esma spokesman said. “The CSRD will provide a powerful tool to address this problem, but it will not provide a solution on its own.
Van Lanschot Kempen’s Dijkstra said EU regulations have “brought sustainability even more to the forefront of the interaction with our clients”, although the legal framework “is still incomplete.” “We cannot yet scope the entire breadth of what sustainable investments could be,” he said.
“The difficulty is the sequence of some of the other EU sustainable finance regulatory elements,” Dijkstra said. “Certain information that is needed for the Mifid 2 sustainable investment inventorisation will only become available at the end of the year. This makes a full product mapping a challenge at this point in time.”
Robeco noted that the EU legislation has required that all market parties address the topic of sustainable investing. “We do however, really consider this to be a journey. The interesting thing will be to see what comes of it in the next five years. Practices of investors will be put to the test.”