1 April 2021

ESG Update

1. EARLY RESULTS IN: Eco-Friendly asset managers

“It is clear from the asset managers we spoke to, of various nationalities and sizes, that it is essential for them to have as many funds as possible classified as Article 8 or 9 under SFDR.” – Morningstar, 31 March 2021

There has been notable media attention this week highlighting asset managers deemed more “SFDR-friendly” than others, based on the first-wave of ESG evidence now readily available in the marketplace.  This follows the initial legal application of the Sustainable finance disclosure regulation (SFDR) on 10 March 2021.

Ignites Europe presented the results of their early SFDR (level 1) study on Monday this week.

With some larger asset managers declining to participate, this prompted some industry experts to predict that the new SFDR obligations could prove more advantageous to competitor firms offering a historical track-record in specialised sustainable investment.

Subsequent updates (e.g. Investment Week, ESG Clarity) refer specifically to the latest analysis performed by Morningstar, who have now managed to analyse almost 50% of the 11,500 open-ended and exchange-traded funds located in Luxembourg (the largest European domicile) – covering 30 asset managers in total.  Their initial conclusions:

  • 18% of LU funds are now classed as SFDR art. 8 product (i.e. formally promoting environmental or social characteristics)
  • 3.6% of LU funds are now classed as SFDR art.9 product (i.e. pursuing a sustainable investment objective)
  • These equate to combined assets of €768bn (i.e. 25% of the LU funds universe reviewed by Morningstar).
  • The entire European ESG / sustainable fund market is currently estimated at €2.5 trillion.

Although 78% of LU funds  (i.e. SFDR art. 6) are now marketed without SFDR alignment: a reminder that all financial products offered to retail and institutional investors are now required to apply minimal SFDR factors (e.g. sustainability risks must now be formally integrated into the investment firm’s decision process, as prescribed in the offering documents).

Meanwhile, Morningstar also reaffirm previous market expectations of a substantial SFDR fund re-classification (i.e. from article 6 to article 8) ahead of the application date for the ESA’s finalised regulatory technical specification (SFDR level 2), currently proposed for 01 January 2022.


2.BlackRock, Vanguard join net-zero push

Last December, we saw the launch of the Net Zero Asset Managers (NZAM) initiative, an initial group of 30 global investment firms (with over USD 9 trillion of assets under management) who outlined their support of achieving the goal of net zero greenhouse gas emissions by 2050 or sooner (in line with global efforts to limit warming to 1.5°C).

This week, it was disclosed that the NZAM has reached 73 signatories (now representing a collective USD 32 trillion AUM).  Among the latest to sign-up are Vanguard, Blackrock and APG asset management.

As stated previously, the NZAM continue working towards their interim target for 2030, i.e. for assets to be managed in line with the net zero goal, consistent with a fair share of the 50% global reduction in CO2 (as identified in the report from the Intergovernmental Panel on Climate Change [IPCC]).


3. ‘Green fury’ over fossil fuel taxonomy plans

As the European Commission (EC) puts together the delegated acts for the separate Taxonomy regulation (TR), closely linked to the SFDR, it is currently rumoured they are contemplating extending the TR classification system (including key “do no significant harm” concept) that would enable fund managers to invest in fossil fuel infrastructure legally categorised as “green” or “sustainable”.

Obviously, this has not been well received by the formidable environmental lobby, including 73 members of the Green Alliance bloc in the European Parliament (i.e. over 10% of representatives).

In his recent open letter, the leader of the German green delegation canvasses the support of EU finance professionals for “credible and clear rules from the EU on Sustainable Finance”, following his allegation that the EC is reacting to pressure from some member states with “special interests… to deviate from the science-based recommendations of the technical expert group on sustainable finance on key issues”.  Purportedly, this includes France with large gas and nuclear industries.

This follows another letter reportedly sent to the EC from the environment ministers in Luxembourg, Ireland, Denmark, Austria and Spain warning that “the taxonomy should not incentivise any new investment into fossil fuel infrastructure”.

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