The regulation designed to shake up the sustainable investing landscape in the EU is one month old. But is it achieving its purpose, or becoming 50 shades of green as asset managers try to interpret it?
Robeco has made a strong start to implementation, with 95% of funds classified as embracing sustainability under the Sustainable Finance Disclosure Regulation (SFDR) – a near totality figure that is considerably higher than the asset management industry average.
Recent research by Morningstar, based on a preliminary data set covering almost half of all of Luxembourg domiciled funds, shows that funds classified as embracing sustainability under Article 8 and 9 of the regulation represent up to 21% of total European funds by number, and up to 25% of total European fund assets worth nearly EUR 2.5 trillion.
Comparisons have become easier because, as its name suggests, the SFDR requires asset managers to disclose the levels of sustainability inherent in their investment products. This aims to enable end investors to assess whether a fund is truly sustainable, or whether the asset manager is indulging in greenwashing – the practice of only paying lip service to sustainability with a few token gestures.
The most visible and impactful element is the classification of funds and mandates into three categories labeled as Articles 6, 8 and 9 of the SFDR. Article 6 covers funds which does not promote any kind of sustainability into the investment process; Article 8 covers those that do promote environmental or social credentials; and Article 9 applies to funds targeting bespoke sustainable objectives.
No less than 95% of Robeco’s strategies are classified as promoting sustainability, encompassing the Sustainability Inside and Sustainability Focused ranges (83% under Article 8) and the Impact Investing range (12% under Article 9). Only 5% of funds that do not or cannot incorporate sustainability are classified as Article 6. As a pioneer of sustainable investing, this is pretty much ‘business as usual’ for Robeco.
“We have 25 years’ experience in sustainable investing,” says Masja Zandbergen, Head of ESG Integration. “We launched our first sustainable equity fund in 1999, the world’s first sustainable water fund in 2001, have been signatories of the Principles for Responsible Investment since 2006, and have integrated ESG across all our capabilities for over 10 years.”
“So, whilst these regulations are new, the underlying building blocks of sustainability have been in place at Robeco for a quarter of a century. We also see many firms committing to increasing their share of sustainable funds in the coming years, but for Robeco, we see our high level of Article 8 and 9 funds as a validation of our long history in sustainable investing.”
“This does not mean implementation was easy for us. We went through a thorough seven-step process to classify our funds. We owed it to our reputation to be ambitious, but we also needed to raised our game in certain areas.”
“We augmented, implemented and published our sustainability risk policy, and we became much more specific, publishing fund documents on ESG implementation, risk and data sources for all of our funds. From what I have seen, many market participants are pointing to existing policies whereas we really go very far when it comes to the transparency.”
So, has the SFDR made the impact expected, one month after it was launched on 10 March? The short answer is ‘not yet’; its debut has been 50 shades of green rather than the holy grail that some had hoped for. But it does provide clients with the right tools to ask tough questions before they ask an asset manager to invest on their behalf.
Whilst the classification system and the transparency it requires does provide some distinction between those funds which integrate sustainability and those which don’t, the differing implementation by managers still needs to be aligned.
Each manager’s classification of its funds – including Robeco’s – is the result of a self-assessment. There is still variation in how different managers have classified their funds. The required detailed disclosures regarding sustainable measures per fund should provide more insight.
“Whilst one of the keys aims of SFDR is to prevent greenwashing, it’s valuable for clients to know that many different shades of green still exist, even within a single classification” says Kenneth Robertson, client portfolio manager with Robeco’s Sustainable Investing Center of Expertise.
“In our case, for example, both our ESG-integrated (regular) strategies and our sustainable strategies are categorized as Article 8. It’s important therefore to be wary of looking just at a label, without understanding what’s going on underneath the surface. Read the actual disclosures and keep asking questions to your managers and expect answers.”
Moving from the assessment regulations in Level 1 to the more complex requirements of Level 2 should lift some of the fog. The Level 1 regulations lacked the concrete details of the regulator’s expectations, so some additional clarity has been provided in the Level 2 regulations, which should raise the requirements for classifying a fund as Article 8 or 9.
“Still the regulation is true to its name in that it requires a lot of transparency and is less prescriptive on what approach should be taken, which in theory still leaves room for a fair amount of greenwashing,” says Robertson.
“The good thing is that fund managers will soon need to begin reporting on green taxonomy alignment and on the 18 adverse impact indicators detailing the negative effects that the investee companies have on wider society.”
“These include topics such as carbon footprints, the effect of the company on biodiversity, and the board’s own diversity in its gender make-up. Fund managers will also have to show development over time and what their approach is to achieve progress on these indicators (if at all).”
He says these adverse impact indicators should help clients detect which funds are really living by the spirit of these regulations, and which are not, combatting greenwashing. “In the meantime, it is of great importance that clients continue to deep dive into the investment process, and the integration of sustainability into that, for any fund they are considering,” he says.
“Over the last month, it is clear that the regulations have been interpreted in a range of ways across the industry, and for now, there is no right or wrong answer provided by the regulator. Therefore, the key to the success of these regulations now lies with clients.”
“Ultimately, the SFDR can meet its stated aim to mobilizing capital and reducing greenwashing if clients have access to actual portfolio impact measures and start to ask the right tough questions.”
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