20 May 2021

Sustainable finance update

Our roundup of the latest in Sustainable Finance

1. EC: announce zero pollution action plan, sustainable blue economy

 “For the health of our children and grandchildren, Europe needs to move towards a zero-pollution ambition. My EC will put forward a cross-cutting strategy to protect citizens from environmental degradation and pollution.”

President of the European Commission 12 May 2021

 Last week, the European Commission (EC) updated their EU biodiversity strategy initiated in 2020, adopting a zero pollution action plan to be achieved by 2050. This includes a set of interim targets to be met before 2030 covering a significant reduction in pollution (air, water, noise) waste and pesticide use, while reducing threats to emerging biodiversity initiatives  – all necessary to improve human health.

Yesterday, the EC made a series of public announcements concerning their formal adoption of a “sustainable blue economy”, including a set of EU aquaculture strategic guidelines.

These latest parts of the European Green Deal follow on from the EC’s legally binding climate change CO2 measures announced in late-April and will run alongside their parallel “farm to fork” strategy to enable transition to a sustainable EU food system.

Collectively, all of the above will now assist the legal specifications of those remaining EU Taxonomy regulation (TR) technical screening criteria placeholders (e.g. Sustainable use /  protection of water and marine resources, transition to a circular economy, pollution prevention and ecosystems establishment).

From January 2023, these will require Disclosure within fund firms’ annual reports and prospectuses.

2. SMSG: still concerned by ‘piecemeal…complex’ EU-ESG disclosures

“The SMSG believes that the synergy between different pieces of legislation [e.g. SFDR, the Taxonomy Regulation, MiFID II, UCITS/AIFMD] can contribute significantly to enhancing sustainability in the economy. However, neither the timings nor concepts of these different pieces of legislation are fully aligned with one another.”

Securities and Markets Stakeholder Group, 14 Sep 2020 (re-quoted 17 May 2021)

The European Securities and Markets Authority (ESMA) and other EU Supervisory Authorities (ESAs) recently conducted a consultation on proposals to incorporate additional TR indicators into their previous level-2 technical standards (RTS) for the Sustainable Finance Disclosure Regulation (SFDR).

The Securities and Markets Stakeholder Group (SMSG) acts as a facilitator between ESMA and its financial industry stakeholders.  In their advice made available yesterday, the SMSG approve the ESA’s efforts to align TR environmentally sustainable activities with their proposed SFDR entity and product measures scheduled to apply from 01 January 2022.  Alongside periodic reporting, these will oblige principal adverse impact statements, pre-contractual disclosures and extensive website updates.

However, the SMSG state they remain “worried by the complexity that results from the piecemeal introduction of different pieces of legislation” and “the use of concepts …close although not identical to one another”.   They originally raised these concerns last autumn.

The SMSG recognise the ESA’s latest draft measures are directly “confined” by the original level-1 legal frameworks imposed by the EC.   Accordingly, they suggest the RTS is amended to reduce general complexity currently facing fund firms and investors alike (by way of “subtle wording changes”, avoidance of “duplication” and further clarifications where indicated).

As before, in order for the ESA’s revised draft SFDR / TR RTS to be legally applied as previously scheduled, the EC must formally adopt these measures (with the European Parliament and Council providing subsequent approval) within the narrow timelines available.

Meanwhile, it remains unclear whether the EC will formally approve of the ESA’s previous SFDR statement that impacted firms can apply “high level and principle-based requirements” in their periodic reporting (i.e. in the event “the RTS is not adopted sufficiently early to allow at least 6 months to enable financial market participants to gather the necessary information and adapt their practices to comply”).


3. Recent market developments


a) BaFIN: propose local sustainable fund ‘strict’ rules / traffic light system

Fonds Professionell reports today of the German funds regulator (BaFin) plan to introduce substantial local fund obligations to avert the growing risk of ‘greenwashing’.

Ongoing, new sustainable funds made available to retail investors (e.g. those actively pursuing sustainable investment objectives, alongside those explicitly mentioning ‘sustainable’, ‘ESG’ or ‘green’ in their product name) would be subject to additional local rules, including a requirement to invest at least 90% of the portfolio in sustainable assets. These proposals are contested by the local BVI investment association, who claim BaFin’s guidelines are largely “unworkable” because the specific criteria are not aligned with the EU regulatory rules (SFDR / TR) currently being applied across the fund marketplace.

Consequently, the BVI now see a risk to Germany’s prospects as a leading ESG fund domicile.

Separately, BaFin also recently announced plans to launch a sustainability traffic light system for retail funds (in order to “make it easier for savers to invest with environmental and social criteria in mind”).

NB: these pre-empt the EC’s eco-labelling system for retail UCITS financial products (where finalised criteria are not expected until the end of this year).


b) DVFA: SFDR disclosure ‘will push up costs’

Still in Germany, Der Berufsverband der Investment Professionals (DVFA) is the largest association of national investment professionals.  Following their recent member survey, they report all local asset managers now forecast SFDR disclosure obligations will increase their annual costs, with most estimates ranging from at least €30,000-100,000 (per €1 billion AUM). One fifth of respondents believe the additional SFDR cost increases will be even higher.

Although 69% of those surveyed expect SFDR will accelerate the trend towards sustainable investing, the DVFA also detect widespread scepticism within their membership (including fears the rules will lead to “excess bureaucracy” which could “spark misallocation of investments”).


c) FCA: obligatory climate risk reporting for AMs, service providers

Meanwhile, over in the UK (now acting independently from the EU Sustainable Finance / Taxonomy regime),  the Financial Conduct Authority (FCA) are set to consult on their proposals for mandatory climate-related risk disclosures from asset managers, life insurers and pension providers.

These will be aligned with the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), with final rules to be announced during Q4 2021.

Press enter or esc to cancel