ESG and sustainable finance update
It's the end of April and here is our latest update on sustainable finance.
1. EU, UK and US announce latest CO2 emission 30 year targets
Last week, the EU Council and Parliament agreed a legally binding set of revised climate change measures. This includes an initial cut of carbon emissions by at least 55% before 2030 (cf. CO2 levels back in 1990), ahead of longer-term continental climate neutrality achieved by 2050.
These were announced the day after the UK government declared their latest target of cutting carbon emissions by 78% before 2035 (en route to their ‘net-zero’ outcome within the same overall timescale).
The new US President also announced his target for a 50% reduction in greenhouse emissions before 2030 (as he likewise attempts to steer his country to carbon neutrality before 2050). This follows Mr. Biden’s recent return to the 2015 UN Paris Agreement signed by his Democratic forerunner.
2. EU Sustainable Finance Package: latest legal components
“We need a great deal of finance to tackle the frightening changes that threaten our planet. Just to meet our 2030 targets will require €350 billion of extra investments per year, over the next decade.”
– Valdis Dombrovskis (EC-EVP), 21 April 2021
In his speech last week, the European Commission’s Executive VP formally outlined the revised package of measures to reform the financial system in order to raise the required investment to transform the EU economy, enabling carbon emission reduction targets to be met within the next 20 years.
In order for the EU to achieve their climate change targets, there is now a raft of additional legislative updates to consider, including:
a) UCITS, AIFMD, MiFID II: Sustainability Delegated Acts
There will be a series of Delegated Acts (DAs) to amend the respective EC legal definitions of existing AIFMD, UCITS and MiFID II regimes to align with the recent Sustainable Finance Disclosure and Taxonomy regulations (SFDR, TR) now being applied. Ongoing, regulated firms will be obliged to maintain the resources & expertise to necessary enable the effective integration of sustainability risks across their organisation (notably, their risk management and investment decision processes).
They will also have to integrate investor sustainability preferences into their corporate product governance, portfolio management, advisory and distribution activities. The EC’s formal adoption of the DAs enables a 3-month period of scrutiny from the EU Parliament & Council (with legal application currently expected from October 2022).
b) EU Taxonomy Climate Delegated Act
Seen as the final part of the EU Taxonomy’s climate change screening criteria, there will be another DA to list those economic sector activities responsible for the large majority of EU carbon emissions, while setting criteria to determine those considered to make a substantial contribution to climate change mitigation / adaptation and / or doing no significant harm to environmental objectives. In a key retraction, natural gas will no longer classed as a “sustainable” asset. This DA will legally apply from January 2022.
c) Corporate Sustainability Reporting Directive (CSRD) proposal
Finally, the EC propose a comprehensive re-name / re-write of their non-Financial Reporting Directive (NFRD). Starting from 2024, nearly 50,000 companies (cf. 11,000 firms currently) will face additional standardised reporting obligations, including revised “double materiality” disclosure. Moreover, CSRD output must be ‘digitally tagged’ to ensure a machine readable feed into the strategic European single access point (ESAP) which remains a key component of the Capital Markets Union action plan).
3. Notable ESG / sustainability market reportage
a) New EU rules risk opening ‘ESG data gap’
“The EU aggressive timeline adds to the challenge of getting a robust governance framework in place across all sales channels taxonomy can either be the engine or the stumbling block of the transition towards a less carbon-intensive economic model”.
FT Ignites have reported mixed reactions to the latest EC sustainability measures.
While some MEPs welcomed the decision to label natural gas as a ‘transitional activity’ (i.e. instead of a ‘sustainable asset’), there remains scepticism about the categorisation of nuclear power and fossil fuels.
In addition, the European Fund and Asset Management Association (EFAMA – including Kneip as a member) expressed concern about an “ESG data gap” opening up in the 2-year gap between the legal application of SFDR (level 2) / TR in 2022 and the first set of CSRD annual reporting published in 2024.
b) ‘Draconian’ ESG distribution overhaul within ‘aggressive timeline’
FT Ignites also cited specific legal concerns surrounding the complexity and timing of the MiFID II delegated act.
The obligation for fund firms to reflect the customised suitability preference of their investors was observed by Linklaters as negating their ability to deploy a standardised ESG investment management strategy (“…painful, especially, if you are a small manager that does not offer bespoke products”).
NautaDutilh also highlighted the challenge facing those operating in the retail sector (i.e. given professional investors are in a position to “do more due diligence themselves on investment products before buying them”).
c) Funds Europe: EU-ESG – ‘Green, greener, greenest’
The latest edition of Funds Europe contains an extended article covering interim prospects for the Sustainable Finance Disclosure and Taxonomy regulations. The piece includes a broad range of current opinion within the marketplace, including BNY Mellon, FE fundinfo, Franklin Templeton, IQ-EQ, Russel Investments, Sustainalytics (Morningstar), ThomasLloyd and Willis Towers Watson.
d) Morningstar: ‘shameful’ ratio of women fund managers in Germany
Finally for now, Handelsblatt have published details of a recent Morningstar research highlighting that only 8.5% of fund managers based in Germany are women (i.e. 82 out of 961, total). This is lower than the current international average (14%) stated.
The national DE average of female portfolio managers is said to be weighed down by the larger number of smaller AM firms (i.e. where most asset managers are male). By contrast, larger local firms are found to have a significant higher ratio, including:
- Union Investment: 22% of female fund managers
- Allianz Global Investors: 21% per cent.
- DWS: 17%
- Deka: 16%
Meantime, the “mega trend towards sustainable investing” is said to be a “promising driver of change” with a likely increase in the number of women fund managers now predicted.