EU disclosure rules to shape ESG strategies

Many European firms are unprepared for reporting under the Sustainable Finance Disclosure Regulation (SFDR), set to commence in March 2021. “There’s a little bit of the industry taking for granted what it now entails to be an [Environmental, Social and Governance] (ESG) fund or firm. Whether or not that causes people to shift their focus …

by | August 7, 2020 | bobsguide

Many European firms are unprepared for reporting under the Sustainable Finance Disclosure Regulation (SFDR), set to commence in March 2021.

“There’s a little bit of the industry taking for granted what it now entails to be an [Environmental, Social and Governance] (ESG) fund or firm. Whether or not that causes people to shift their focus away from ESG, there’s quite a few firms out there don’t classify themselves as an ‘ESG firm’ as part of their investment strategy, but will claim to look at ESG factors, which will be reflected as part of their investment and marketing strategy,” says Dani Williams, principal consultant, ACA Compliance Group of the upcoming regulation.

“Obviously now as the disclosure regulations come into play, there is no ambiguity around ESG claims anymore. However that does not have to stop firms from making investments in ESG type products – they just no longer can claim to be complying with ESG.”

Issued by the European Securities and Markets Authority (Esma), European Banking Authority (EBA) and European Insurance and Occupational Pensions Authority (EIOPA), SFDR allows the three European Supervisory Authorities (ESAs) to develop standards on ESG disclosures.

“Historically, the financial services industry hasn’t had a clear set of harmonised definitions of what sustainability investing means, so the sustainability disclosure regulation goes a long way to clarifying what sustainability investments are, and what the regulatory expectations are if an investment manager is factoring these into their portfolio,” says Roxy Nadershahi, principal consultant and private markets practice specialist at ACA Compliance Group.

“Buy side firms that are ESG-focused will already have done much of the work to prepare for the sustainability disclosure regulation. However there will be a number of alternative investment managers that have only just begun thinking about this now.”

According to a Linklaters survey published in July, 34 percent of EU infrastructure fund managers are unaware of SFDR.

“The new regulation requires integration of sustainability risks in investment decisions and transparency in ESG reporting,” said Ali Mamujee, vice president product marketing and ESG at Mercatus, a data governance platform, in an email. “This is going to force investors to move away from anecdotal ESG case studies and a greater focus on quantitative data."

ESG funds have recently been under the spotlight for improper labelling in the US. In July, Securities and Exchange Commission (SEC) commissioner Elad Roisman addressed concerns over “greenwashing,” or misleading investors by advertising a non-ESG product as ESG. He called on asset managers who want to use labels such as “ESG” and “green” to explain how these terms would influence the product’s investment strategy, the FT reported.

According to Williams, the ESG investment landscape could look different after the disclosure regulations come into play.

“We can see one of two things happening: either a firm may lean away from having to comply with disclosures, but may get pressure from investors to do so. And it will be interesting to see how that develops and how much appetite there really is in the market from investors who may pressure firms to comply with ESG and sustainability disclosure regs,” she says.

“Or firms may find a lack of appetite from investors to continue with ESG factors as they have concerns around the impact of stricter sustainability regulations.”

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