Given the significant resources and costs that the asset management has incurred to date, many investment firms are hopeful that the European Commission, in its upcoming review, will allow enough flexibility in application of the rules so that firms are not required to incur further costs, significantly change their processes, or potentially SFDR classifications, says Rebecca Palmer, ESG director at Dublin-headquartered management company Waystone.
IO: Has ESG regulation become an obstacle to running funds?
Rebecca Palmer: “Enhanced disclosure around the E and S characteristics that are promoted by an investment product should make it clearer for investors as to the nature of the product they are investing in. However there are widely different interpretations of the regulations, for example the definition of a “sustainable investment”, which can make it challenging for investment firms (in ensuring that they comply with regulations) and investors (in being able to compare ESG products and assess their suitability for their sustainability preferences).
One investment manager described trying to comply with SFDR as “trying to drive the car, whilst the engine is still being built.”
IO: The EU this summer will review the SFDR and sustainable finance rules. How would you like to see this situation addressed?
RP: “Significant time and costs have been incurred to date as investment management firms have built reporting systems, established processes to gather data and put in place oversight controls, drafted the relevant pre-contractual disclosures (often with significant input from legal counsel given the varied interpretations) and grappled with how portfolio managers can ensure that their investment decisions are aligned with SFDR and EU Taxonomy. Given the significant resources and costs incurred to date, many investment firms are hopeful that the European Commission in its review will allow enough flexibility in application of the rules so that firms are not required to incur further costs, significantly change their processes, or potentially SFDR classifications.”
IO: Are fears of greenwashing a factor for managers of ESG funds?
RP: “The Sustainable Finance Disclosure Regulation is a disclosure regulation that has for some become a de facto labelling regime, which has caused some challenges in how products are marketed. Investor demand for Article 8 and 9 products continues to grow thus it’s not uncommon for investor relations teams to push for new investment products to be Article 8 and 9.
Sometimes the drafting of pre-contractual disclosures can be left to the firm’s compliance team, however it’s essential that the portfolio team is heavily involved in the process.
The risk of greenwashing is significantly reduced if the portfolio team is involved at the outset.”
IO: The political debate in the US around ESG investments is heating up after the state of Florida officially banned such investment with public funds. Do you expect that such sentiment can also become a factor in Europe?
RP: “European member states are broadly aligned with their support for the Paris Agreement and the steps needed to transition to Net Zero, so it is unlikely that we will see the kinds of anti-ESG sentiment that has been seen in some US states.“
IO: Is there anything else we should know in this context?
RP: “Greywashing or greenhushing have been raised as concerns, given the increased regulatory and legal risk associated with complying with ESG regulations, with some firms potentially seeking to underplay ways in which ESG factors are integrated into their fundamental analysis.”
As there is no global convergence on ESG regulations it is also challenging for firms that are seeking to market into different jurisdictions.”
This article is the fourth in a series taking stock of the latest discussions on ESG and sustainable finance in the asset management sector in the EU and Luxembourg. The previous articles ran on 16, 17 and 24 May.
Related articles on Investment Officer Luxembourg:
- ‘Positive ESG impact doesn’t come at cost of financial return’
- ‘Reputation risks may lead to fewer ESG products’
- SFDR clarity welcomed but greenwashing fears linger