ESG investment: a regulatory update

The Fund Management Industry has seen since few years now an increasing demand from investors for sustainable investments. More and more asset managers are set-upping new vehicles or reallocating old ones in order to be sustainable. But how much ESG (Environmental Social & Governance aspects) their portfolios really are? In order to protect investors, the regulators are trying to put in place a common language called “Taxonomy”, where fund managers would report on different levels what they are doing and the results of it. However, without this official Taxonomy, it is difficult for investment companies to report clearly such results, and it could be misleading for investors as no comparison are therefore available.

However, sustainable investment brought the desire from the clients to be aware of their “green assets” and, to satisfy this demand, fund managers are already disclosing on it, but simply as they want. To regulate what has to be disclosed and how, on Thursday 22nd April the European Supervisory Authorities (ESAs) proposed to regulate the different disclosures, contents and methodologies. Different levels of information are considered as needed and should appear on different documents like, KIIDs, prospectus, factsheets. Nevertheless, for the moment, as no real Taxonomy has been validated, the Asset Management companies already put in place their own framework about the analysis, disclosures and the measurement of the criteria, via a “scorecard” for example. It summarizes how good the underlying asset analyzed is in terms of ESG and could be easily interpreted as a disclosure document. In general terms, the regulators are recommending more transparency but also to justify every investment.

Indeed, it is a long process for the regulators as they have to cover and define all the aspect of the management of assets. It has to be strict but at the same time without too many constraints, as it has to encourage good practices and managers to follow them, otherwise they could just forget about ESG and decide not to do it anymore. As an example, a fund manager, who is implementing ESG integration within its investment process, will be asked to detail precisely this strategy. And it will not be only qualitatively, but also quantitatively like how much weight the ESG part is in the investment process.

To avoid misleading communications, the fund manager will have to explain differently depending on the name of the funds. An ESG fund is different from a SRI or positive impact one. The purposes, activities and impacts of the underlying assets are different. As an example, for a SRI fund, what is the real weight of the pure SRI investments. Because a SRI fund has a portfolio that should have an extra financial impact at the end and the manager will have to prove that is not only some simple ESG exclusion. This impact is measurable and supposed higher than for an ESG fund. The investor must be aware of it and not be confused.

Increasing demand for sustainable assets brings the so-called “greenwashing”. But the regulation is changing and trying to protect the investors against it. With the new regulation coming, fund managers will have to provide information about these green assets, and obviously, “greenwashers” won’t be able to do it. Many consultancy companies are now trying to help to report and disclose the required information in order to publish them. The fund managers will have for example to describe precisely why their assets are sustainable and how they chose them. The different Labels are not enough anymore to assess it is not greenwashing. Effectively, simple exclusion is enough now to apply to an ESG Label but does not guarantee the investor a real impact.

The European Supervisory Authority is helping the different entities and will soon communicate concrete updates about the coming regulation.

Giuliano Rossi,

ESG Analyst, FIA Asset Management