It seems like a good time to take stock of sustainability regulation. It’s now four years since the EU plan for financing sustainable growth was adopted by the European Commission, over one year since the first phase of the Sustainable Finance Disclosure Regulation (SFDR) came into effect, and we’re now right in the middle of implementing the second phase. So, let’s reflect on how this regulation has affected the asset management business so far. What hurdles do we still need to overcome? And is the regulation helping or hurting our ability to manage assets sustainably?
Let’s start with the positive aspects. As the regulation is meant to finance sustainable growth in order to reach the Paris Agreement climate goals, its focus is on creating a positive impact. Whereas ESG integration (done for purely financial reasons) has been implemented by many asset managers in the last couple of years, impact investing by thinking about ESG opportunities is often still only applied to small parts of investment portfolios.
The use of the term ‘double materiality’ (financial and societal effects) in the regulation is making the industry needing to think more about the real world impact they are making for the entire book of business. It also requires putting more effort into showing how this real world impact is being achieved. As investors in listed securities, showing this impact is however very difficult.1
Furthermore, a few years ago, the nature of ESG, carbon and other sustainable investment restrictions were communicated to clients, but were often not included in official fund documentation and investment contracts. The regulation is making sure that what asset managers claim they are doing in sustainable investing is also what they actually implement and include in legal documentation.
And if something is added to a legal document, it becomes well controlled in the organization. So, the regulation has sped up the integration of ESG information in data and IT architecture, trading systems and risk management and compliance processes. Finally, sustainability information is being taken seriously!
The regulation seems to be slowly leveling the playing field for sustainable investing in the asset management industry. It is creating a leapfrog effect: asset managers that are currently leading on sustainability need to continue to find new ways of standing out from the crowd. This requires making strategic and proactive choices.
We expect the industry winners to set the tone and take the largest piece of the assets under management pie. The winners will also be able to more easily attract young talent as the younger generation cares more about these issues.
So far, these are the clear positive aspects. A question mark for me is whether the regulation actually sheds more light on the darkness of sustainability acronyms. Defining which economic activities contribute to certain sustainability goals is a smart idea, and the first part of the EU’s Green Taxonomy and the Principal Adverse Impact indicators seem well defined and make sense. However, currently less than 5% of economic activities are defined in the taxonomy, and data on these elements is either still lacking, or is of poor quality.
For other elements of the regulation, such as good governance, sustainable investments and doing no significant harm combined with social safeguards, everyone is coming up with their own approach. So the end-investor will still be comparing apples with pears until these definitions start to converge.
Another aspect I want to mention is that characterizing an investment strategy as promoting E and S (Article 8), or as having a sustainable objective (Article 9) means there are many hoops to jump through or to report on (e.g. good governance, sustainable investments, Principal Adverse Impacts, taxonomy alignment). If you not only want to report on, but also steer on (part of) these elements, this will mean piling up a number of restrictions on your investment universe.
And our clients select us not only because of our excellent sustainable investing offering, but also based on our investment performance. So, the key here is to balance everything the regulation is asking of us, making sure the choices we make fit with our current leadership position in SI, while keeping our ability to create enough financial value for our clients. It’s a truly delicate balancing act.
Lastly, let’s make sure that implementing this very large piece of regulation does not keep us from financing sustainable growth, which is what the legislation is actually meant to achieve. For us, this means investing assets in a sustainable and financially sensible way, and being an engaged and active owner of the issuers we invest in.
The legislation puts a large burden of proof on asset managers that are actually implementing sustainable investing over their entire book of business. It is key to not get distracted by drawing up all kinds of disclosures and filling in templates. We need to continue to do research, come up with innovative investment solutions, partner with clients, peers, NGOs and academics and drive change.
Having said this, ultimately, I believe the regulation is pushing the industry not only towards better transparency and comparability, but also towards better practices. What gets measured (and more importantly reported on) will also get done.
I would like to thank Leontine van der Goes our SFDR program manager for her views and input for this column.
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商号等： ロベコ・ジャパン株式会社 金融商品取引業者 関東財務局長（金商）第２７８０号
加入協会： 一般社団法人 日本投資顧問業協会