29 January 2021

EU ESG rules: the global standard?

Here is the latest sustainable finance catch-up from Kneip.

1. SFDR deadline: no EC response (yet); ‘goldplating’ alert

At the time of writing, the European Commission has not  (formally) replied to the European Supervisory Authority’s request for urgent clarification of key priority issues related to the Sustainable Finance Disclosure Regulation (SFDR) ahead of the initial 10 March 2021 deadline.

As before, this leaves ESMA unable to issue pre-emptive, collective guidance to EU fund firms outlining how they are expected to reasonably meet their level 1 obligations.

Consequently, ESMA’s constituent national competent authorities (NCAs) seem to have been left to their own devices to issue (variable) SFDR guidance to their local asset managers.

Following Luxembourg and Germany’s more recent updates, the French AMF last week revised their previous SFDR advice, now declared “goldplating” by at least one legal firm (who observe the “counterintuitive” rules applied to French and non-French “ESG” funds administered in the AMF’s revised Doctrine).

Watch this space for any updates.

2. FT Ignites: inspects Top-11 firm climate pledges, carbon footprints

Starting next year, the EU Taxonomy regulation (TR) will require larger investment firms to disclose in their Annual Reporting how well their underlying investments contribute substantially to climate change mitigation and adaption environmental objectives set by the EC.

In a series of articles this week, Ignites Europe examines the carbon footprints of some of Europe’s largest fund managers, including:

– firms with the highest CO2 emissions per employee (see illustration)

– scrutiny of their varying ‘greenwashing’ climate pledges

NB: sceptical commentary on their findings is supplied by Green ElementClient EarthSouth Pole and Climate Neutral organisations.

3. The IA: ESG focus remain key ‘drivers of value’

Every year, the UK Investment Association (TheIA – with Kneip as a member) publish a statement outlining their latest set of priorities for those investing in companies listed on the stock exchange.

The latest 2021 shareholder priorities statement confirms that despite COVID-19, IA members believe that companies should retain their focus on the four key areas flagged last year as critical drivers of long-term value, i.e. responding to climate change, stakeholder engagement, diversity and audit quality.

Adjusted expectation areas include a greater focus on capital management, accounting for climate-related matters, COVID-19 specific stakeholder engagement, and a focus on companies’ plans to meet the Parker Review targets for ethnic diversity on boards.

“All companies” are encouraged to use the IA document to “gain an understanding”.  Meanwhile, the IA’s Institutional Voting Information Service (IVIS) will analyse company performance, highlighting those results not meeting investor expectations in due course.

4. EU ESG rules: the global standard?

Mindful of “reams of legislation” poised to “transform” the financial sector, FT Ignites also considers whether EC’s Sustainable Finance standards can become the “global default”.

While the likes of Eurosif and Fundrock CEO (ex-AMF) share optimism, the Investment Company Institute (ICI) and BBH’s regulatory intelligence chief express their doubts – notably, non-EU market unwillingness to accept the EU’s “double materiality” concept (i.e. investment risks and opportunities viewed from both financial and non-financial perspectives.)

By comparison, the SASB (a US-based non-profit organisation with BlackRock, State Street Global Advisors and Franklin Templeton among its members), declare their preference for “disclosures limited to the needs of users of financial statements”.

5. EFAMA: calls for Europe-wide ESG data and research regulation

Investment Week reported recent support from the European Fund and Asset Management Association (EFAMA) for a European regulation of ESG data, research and ratings, given the dependency on third-party providers, high costs and inherent risk of greenwashing.

This aligns EFAMA with last month’s joint proposition from the French and Dutch regulators for a regulatory framework to govern EU-based sustainability-related service providers (SSPs).

6. Other EU updates

Luxembourg: Greenpeace demands sustainability action from local fund firms

The Luxembourg Times reported on Thursday that latest Greenpeace analysis finds that the 100 largest equity funds in Luxembourg are on average around 10% more carbon-emission intensive in comparison to the broadly diversified MSCI World Index. The fund industry is also said to have “a disproportionately high exposure to coal”, with locally domiciled funds “financing 39 million tonnes of greenhouse gas emissions” (in 2019 alone).

Germany: funds association presses for common ESG standards with UK

The BVI association (also with Kneip as a member) are calling on the EC to include common sustainable finance principles and reporting standards principles in post-Brexit memorandum of understanding (MoU) pencilled in for completion end-March 2021.

This comes as the EC continues their review of the non-financial reporting directive (NFRD) to integrate additional (post-Taxonomy) sustainability disclosure into company reporting.

EC: kicks off ESAP for financial and non-financial information consultation

Last week, the EC opened a consultation on how to establish a European single access point (ESAP) for companies’ financial and sustainable investment-related information (i.e. disclosed as a result of the EU ESG legislation).

Widespread opinion is now sought (until 03 March) from EC’s target groups, including:

  • Preparers:companies, issuers, SMEs, asset managers, market participants
  • Users: banks, investors, analysts, asset managers, consumers, NGOs, data vendors
  • Regulators: authorities, governments, European Authorities, National regulators
  • Registers / repositories: OAMs, trading venues, ESMA, business registers
  • Stakeholders with vested interest: software vendors, standard setters, accounting firms, not for profit organisations, academia.
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