The EU’s sustainability disclosure rules are too complex and risk overwhelming consumers with too much information they do not understand.
This was one of the points made during a Funds Europe webinar on sustainability reporting entitled ‘Conquering the ESG data and reporting challenge’.
Fund managers face a wave of regulatory and non-regulatory reporting requirements over the next two years and beyond. 2021 saw the introduction of the EU’s Sustainable Finance Disclosure Regulation (SFDR) but firms also face requirements for MiFID II, the Insurance Distribution Directive and whatever rules the UK brings out.
While the industry welcomes the introduction of more disclosure around sustainability, there is also concern about just how complex the initial implementation of these rules will prove to be.
As Emery said: “The direction of travel is excellent but the journey is like being stuck in a traffic jam on the M25.”
He described the current situation as a “complex quagmire with competing regulations both nationally and internationally with different sectors and different market participants”.
One of the problems with the SFDR is that it has only been partially implemented. It went live in March 2021 but without the regulatory technical standards needed to complete the reporting.
According to Sebastian Brinkmann, ESG strategic sales specialist, FE fundinfo, this has created a labelling regime where firms have registered their funds in line with the EU’s categories – articles 6,8 and 9 - but without the detail needed to explain what those categories mean.
“On the one side, the EU will be content with the number of funds that have registered as sustainable,” said Brinkmann. “But the degree to which they can prove that sustainability and provide the necessary data will be a huge regulatory risk for a lot of firms.”
A further complexity for UK funds is that UK rules are likely to diverge from the EU. However, the UK’s Financial Conduct Authority’s more principles-based approach could serve as a preferable alternative to the European Securities and Markets Authority’s (ESMA’s) rules-based stance with the SFDR.
Emery cited the FCA’s talk of a transparency toolkit to help investors navigate the ESG market as opposed to ESMA’s “policy approach to shift capital”.
“We have to understand that this is a consumer-facing business and we have to make it simple,” said Emery.
Mikkel Bates, regulatory manager, FE fundinfo, highlighted the FCA’s use of the phrase “decision useful disclosures” as a means to help consumers make their decisions about sustainable investment.
Another challenge facing the industry is the lack of standardised data around ESG, said Thomas Harding, head of ESG regulatory solutions, ISS ESG. While there are certain initiatives such as the European ESG template and the Single European Access Point designed to bring more harmony to the reporting process, Harding stated that the initial cost burden on ESG data vendors and market participants will be significant.
“Ultimately more data is a good thing as long as it is reliable but it is inevitable that it will come in different formats, especially during these early stages,” said Harding.
Despite the daunting challenges facing firms, there was also some optimism expressed by the panellists including the prospect of more interoperability around sustainable finance, an increase in the provision of more high-quality sustainability data from corporates, the development of a more consumer-friendly labelling regime and recognition of a fundamental shift in the industry’s embrace of sustainability. .
As Emery concluded: “Clients are demanding that we are stewards of their capital and not just valuers of equity. It is a fundamental shift and will take many years to develop but I can only see the acceleration of this heading in the direction we all want it to go.”
The webinar can be viewed here:
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