A) EU ESG mop-up
1. Sustainable Finance Disclosure Regulation: some regional updates
Unlike the CSSF in Luxembourg, other national competent authorities (NCAs) across the EU have been slow to react after the recent EU legal publication of the SFDR regulatory technical standards (RTS).
- the Central Bank of Ireland CBI) are yet to make any latest SFDR “fast-track” announcement to confirm their filing protocol and deadline. They had recently updated local guidance (based on the EC’s latest SFDR Q&A) with the expectation that any amendments to previously-filed SFDR pre-contractual documents should be carried out “at the earliest available opportunity”.
- France: the Autorité des marchés financiers (AMF) have yet to issue an updated SFDR RTS-related communication ahead of 1 January 2023.
- Germany: BaFin have not commented since the recent SFDR RTS publication. Their draft guidelines for sustainable fund disclosure remain incomplete, following their consultation exercise in 2021.
2. Firms cite ‘divergent’ local SFDR rules ahead of 1 Jan
“People think that if a fund is [SFDR] article 8, it can be sold everywhere as ‘sustainable’; but that is not the case.”
FT Ignites report several fund firms and experts observing an uneven SFDR transition across the EU.
One asset manager currently view “divergent ESG investment supervisory approaches” in France, Germany and the Netherlands, concluding: “That is a big issue for us“.
BaFin’s proposals continue to prompt negative market reaction, including the 75% minimum threshold for sustainable assets held by ‘dark green’ SFDR art.9 funds in Germany.
- One firm claim asset managers are now “shying away from setting up a fund in Germany”, while “a lot” of firms “…question Germany’s imposition of investment thresholds for sustainable funds”.
- Another UK-based company say BaFin’s local rules, alongside varying interpretation of ESMA’s recent NCA guidance, may result in funds considered SFDR art.9 in Luxembourg to be classed as SFDR art.8 ‘plus’ in Germany.
3. MiFID II, EET challenges continue
“Each country has its own MiFID II target market concept.
The whole situation creates a lot of confusion for the market participants since you have too many levels
working independently of each other in a very dynamic and fast-changing environment.”
Despite SFDR-related amendments to MiFID II on 2 August, it is claimed fund firms are unwilling to present their ‘light-green’ SFDR art.8 products as ‘sustainable’, during the updated client suitability assessments now legally required.
The European ESG template (EET) was developed to help MiFID firms align their investors with suitable products, while enabling a standardised data exchange between manufacturers and distributors.
However, those presuming SFDR art.8 funds domiciled (as ‘sustainable’) in one member state can be easily marketed uniformly across the EEA are said to be mistaken.
One asset manager recently cited additional “onerous” distribution requirements in Germany, which present a challenge for current SFDR art.8 products to be codified as ‘sustainable’ in their EET.
To add to the confusion, legal sources say that because the EET is not a mandatory requirement for asset managers to complete, “…it is possible for an art. 8 fund to be sold to investors who have sustainability preferences, where the fund hasn’t completed the EET“.
4. ESMA: schedule product governance public hearing
More MiFID complications lie ahead in relation to additional product governance rules, set to apply from 22 November 2022.
The European MiFID template [EMT] is based on target market information supplied to clients, with the latest version (EMT v4.0) directly interacting with the current EET.
As outlined in ESMA’s draft guidance, target market regimes must be reviewed and updated to ensure products with ‘sustainability factors’ are properly distributed to the identified clients. This may create further challenges for product manufacturers and distributors (alongside more regional variations) within the time remaining.
On 14 September 2022, ESMA will hold an open hearing on their draft MiFID II product governance guidelines, seeking “to gather views and qualitative/quantitative information stakeholders may have on the subject”. Their consultation will continue until 7 October 2022.
5. ESAs: publish 1st PAI disclosure annual report
The concept of principal adverse impact (PAI) remains one of the most challenging elements of the SFDR regime, legally outlined as “those impacts of investment decisions and advice that result in negative effects on sustainability factors.”
The European Supervisory Authorities (ESAs) recently published their first annual report on ‘the extent of voluntary PAI disclosure’, following an initial NCA survey. It provides a “preliminary, indicative and non-exhaustive” overview, with notable content including:
- A ‘Lessons Learned so far’ chapter
- Presentation of PAI disclosure efforts so far (i.e. both “good” and “less good” examples)
- ‘Best practices and preliminary recommendations’ to ensure the NCAs attain ‘appropriate’ supervision of financial market participants (FMPs) practice of PAI indicators in due course.
The ESAs cite the “often vague” disclosure on the degree of alignment with the objective of the Paris Agreement; they also highlight a “low level of compliance” with required explanations of why FMPs do not take the adverse impact of their investment decisions into consideration.
NB: a reminder the ESAs have been mandated to revise the current PAI disclosure rules within their SFDR RTS (at Entity and Product level) before May 2023.
6. EC: set to shelve Social taxonomy ‘indefinitely’
The EC’s sustainable finance strategy includes integrating environmental, social and governance (ESG) factors across the financial sector, as part of the transition towards a greener, more sustainable economy.
The current Taxonomy regulation (TR) largely relates to environmentally sustainable economic activities.
Back in February, the EC’s Platform on Sustainable Finance (PSF) expert group delivered a detailed report on their proposed social Taxonomy (“taking the current environmental taxonomy as a starting point”).
However, Bloomberg quote insiders claiming the EU Social taxonomy has been “shelved indefinitely”, amid apparent “infighting” and resource shortages.
B) UK sustainability latest
FCA: publish environmental sustainability targets and metrics
While the funds industry await more details of the UK’s answer to the EU taxonomy and SFDR regimes, the FCA have begun to share their environmental sustainability targets and metrics information.
The FCA say these will be updated accordingly to show the steps taken “to become a more sustainable organisation and keep us accountable for our progress”. They will also annually report performance achieved against set targets.
C) Recent market trends
1. ESMA call for SFDR “rethink”
“The use of current sustainability disclosures under SFDR as a ‘label’ can be misleading”
Verena Ross, ESMA chair
Bloomberg reported this week that ESMA are actively seeking a “rethink” of the SFDR rules, having detected the current framework being “misinterpreted”, while some firms “treat the EU’s disclosure regime as an ESG labelling system”. The ESMA chair said she now supports “the development of simple and clear information to help investors take informed investment decisions”.
2. Morningstar: “23% of art.8 funds do not merit ESG tag”
ESMA’s reaction follows Morningstar’s latest analysis concluding almost one quarter of ‘light-green’ SFDR art.8 funds failing to be recognised as ‘sustainable’ under their ESG framework.
Last February, the research firm formally removed over 1,000 funds / €1.4 trillion AUM from their list of European ‘sustainable’ funds, following review of available documentation.
As at end-June 2022, Morningstar estimate:
- SFDR art. 8 funds total AUM: €3.8 trillion
- SFDR art. 9 funds total AUM: €0.4 trillion
During Q2-2022, art. 8 funds recorded outflows of €30.3 billion, art. 9 funds saw inflows of €5.9 billion.
3. Global funds industry faces ‘climate reckoning’
As the Net Zero Asset Managers initiative reaches more than 273 signature firms [total AUM: €62 trillion], it is reported that barely one third are on track to reach net zero emissions portfolio target, before 2050.
4. Firms “rush to fill huge SFDR data gaps”
“There is quite a lot of scrambling by data providers to provide the information
needed to meet the SFDR’s very ambitious programme of PAI disclosures”.
Panellists at a recent industry webcast observed fund firms and data providers “scrambling to meet” the year-end deadline for SFDR/TR product disclosures, amid continued “huge gaps” of available ESG data.
D) Trust Kneip with the EET (and EMT)
As before, Kneip’s market-leading ESG disclosure solution includes an end-to-end EET package (data collection, template production and dissemination). It remains available to all ESG latecomers, for rapid deployment, within the scarce time remaining.
Get in touch to book a demo with our experts.