A lack of reliable Environmental, Social, and Governance (ESG) data is significantly hindering the implementation of the European Union’s sustainable finance regulations, according to a survey by the CFA Institute.
The survey, which examined the EU›s regulatory policy on ESG investing, highlights the need for clearer regulations and more dependable ESG data to ensure these regulations are effective.
Compliance push and investor demand
The survey identified two main reasons asset managers integrate ESG factors into their strategies: compliance with EU disclosure rules and increasing investor demand for sustainable investment products. Despite these motivators, the study pointed out several major obstacles to fully implementing ESG regulations.
One of the biggest challenges is the lack of reliable ESG data, which complicates compliance with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy. This problem is worsened by the high costs of data collection and the need for extensive personnel training. Additionally, the complexity and sheer volume of sustainability information overwhelm retail investors, making it difficult for them to make informed investment decisions, the CFA report found.
Asset managers challenged to implement SFDR:
“The excessive volume and intricacies of sustainability information confuse retail investors, making it difficult for them to use such information to make sound investment decisions,” said Roberto Silvestria and Josina Kamerling in the CFA report on the survey’s results.
They also noted that the complexity of sustainability reporting is expected to increase significantly next year when European issuers start reporting under the new European Sustainability Reporting Standards (ESRS) framework.
Recommendations
The CFA Institute made several recommendations:
1. Clearer ESG terminology: EU regulators need to provide clearer and more consistent ESG terminology across the legislative framework. This would help reduce varied interpretations of rules and standards, thus minimising confusion and enhancing compliance.
2. Improvement of ESG data quality: The study urges EU regulators to consider the high costs and challenges associated with data collection and staff training, which currently hinder compliance. “These issues are currently limiting compliance with the present disclosure requirements,” the report stated.
3. Clarification of fund categorisation: In the context of the ongoing review of SFDR, the CFA Institute considers it essential to clarify the fund categorization system under Articles 8 and 9 of the SFDR to reduce the complexity of ESG disclosures and mitigate the risk of greenwashing.
Investment strategies
The survey revealed mixed perceptions of the EU›s sustainable finance strategy. While many respondents view the EU’s efforts positively, there is also notable criticism.
Approximately 42 percent of respondents believe that the EU’s regulatory initiatives have directly increased investments in sustainable development and energy transition. However, 49 percent feel that these regulations have not effectively redirected capital flows toward sustainable investments.
Greenwashing concerns persist
Greenwashing remains a critical concern, with most respondents expressing significant worry about the risk of misleading sustainability claims in the EU fund industry. The study recommends that global regulators collaborate to establish a common definition of sustainability and ensure compatibility of disclosure requirements to mitigate these risks.
“To mitigate greenwashing risks, global regulators could collaborate to find alignment on a common definition of sustainability and the compatibility of disclosure requirements,” the study concluded. “Additionally, requiring full transparency of ESG ratings and methodologies and better clarifying key concepts within the EU sustainability-related rules can help reduce the perception of greenwashing.”
Sentiments towards greenwashing in the fund industry
The survey was conducted in December among 435 members of the CFA Institute in EU countries.