Sustainable finance regulations: a driver for the asset management industry?
In recent years, we have seen a significant increase in the importance of CSR issues within the finance industry, driven by the urgency of certain major challenges such as climate change and the decline in biodiversity, as well as an awareness of the levers we have as investors and the potential for value creation within the companies in which we invest.
As a result, we have also seen an extremely strong acceleration of regulations on sustainable finance over the last 2 to 3 years.
Why is this?
To satisfy the need to direct capital flows towards responsible investments
To encourage players to better integrate the risk management dimension and to have a long-term vision
To provide a framework for these approaches that are emerging from all sides in order to raise the game and limit greenwashing
With its sustainable finance action plan, Europe has been a pioneer in the supervision of ESG practices in finance, notably with the much-vaunted European Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR), the first European regulation specific to this sector.
What is the objective?
To create a clear, structured and above all homogeneous framework in order to harmonise and reinforce the transparency of sustainable products in the European financial market and thus limit all attempts at greenwashing.
This regulation therefore provides long-awaited answers on how to define objectives, communicate our commitments and qualify our actions and ambitions regarding sustainability.
Many asset managers were already committed to a CSR approach, but in a very heterogeneous and unfocused way. There were still many players with little or no commitment.
The Sustainable Finance package is a real boost to the implementation of a CSR approach, which is becoming a must-have rather than a nice-to-have. It is more and more difficult for asset managers to declare that they do not take these issues into account, as everyone wants to match the best in class on these topics.
It provides a framework for the foundations we need to put in place to have a solid and transparent approach, it pushes us to systematise the integration of ESG in our processes, to commit ourselves to our investors and to respect these commitments.
We are no longer expecting a statement of intent or a best effort.
We have to define what characterises our approach and commit ourselves to respecting it contractually, since this is in our fund regulations.
We must now define our ambition, systematise it in each of our investments, industrialise our procedures to generalise this approach and monitor it. We need to train and raise the awareness of both the investment teams, who must implement these commitments at fund level, and the investor relations teams, who must explain these commitments to investors. We must also educate and support the companies we invest in to help them progress on sustainability issues. This means mobilising our employees, our stakeholders and part of our resources to address these issues.
However, it leaves a substantial number of unanswered questions, as it has revealed strong challenges and specificities related to our business.
The Sustainable Finance regulation is a layered regulation: the SFDR regulation itself (level 1), the SFDR delegated regulation (level 2) and the multiple publications by the European Commission and the European supervisory authorities make the whole framework illegible for neophytes (and difficult even for "experts").
It is highly evolutive, as is the European Taxonomy, which will be completed with new themes in the coming months.
The need for communication and education for market participants is huge. Many asset managers are very small and ill-equipped to deal with the massive arrival of regulations on sustainable finance.
Some institutional investors wish to invest primarily in art. 9 SFDR funds because they themselves must comply with certain rules. But beware, the SFDR regulation is not a label, it is about rules on transparency and the publication of information by the financial actors concerned.
Indeed, as a reminder, we talk about product classification according to SFDR in "art.6" products/funds (no ESG specificity of these funds), "art.8" funds (promotion of certain ESG characteristics) and "art.9" funds (funds including only sustainable investments in the sense of SFDR).
Very quickly after the SFDR, article 9 was considered the most virtuous level and therefore it became necessary to target this category in order to show commitment.
However, the hierarchy of Article 8 or 9 must be qualified; Article 9 is not too demanding, but it characterises a very specific investment thesis, mainly sectoral or thematic, whereas Article 8 gives funds the freedom to integrate CSR to a greater or lesser extent into their process and allows the most ambitious ones to act concretely for the transformation of the invested companies, whatever their activity or their level of ESG maturity at the time of investment.
Sustainable finance regulations are not a label that guarantees uniform practices. It is a framework within which we can define our CSR strategy and within which we must formally commit to our investors.
Looking beyond regulatory constraints
So we are in a world of regulatory constraints, but also and above all of environmental and societal emergencies to be addressed that are impacting the sustainability of the companies we support and the ability of future generations to live sustainably on our planet. Companies must therefore be particularly active in addressing these challenges.
Indeed, these regulations are not only there to constrain us, they are mainly linked to a global awareness of the major issues we are facing, primarily the acceleration of climate change and the biodiversity crisis.
So, let's not focus only on compliance issues. Our mission must remain above all to support companies in their sustainable transformation and in their ecological transition. And the good news is that as an investor, we have the means to act!
Noëlla de Bermingham, Chief Sustainability Officer, Andera Partners