Flash Video - Asset management: The challenges of SFDR's new "green" reporting

The ESG Reporting came into force on 10 March 2021. What exactly does this reporting mean for asset managers?

It’s more than just a reporting, and we should really be calling it “SFDR¹” reporting rather than simply “ESG²”. It’s about gathering a great deal of diverse and varied, static and dynamic information, with analyses that need to be carried out on the 15 largest investments in terms of sustainability. To measure major negative risk, there are 14 sustainability indicators known as PAI, which stands for “Principal Adverse Impacts”. At least one of these focuses on climate and the environment, while another looks at social aspects like employees, human rights or anti-corruption.

There are two parts to SFDR:

The first part, is that which has been applicable since 10 March 2021, consisting of describing the investment strategy in what we call “pre-contractual” documents, i.e. the prospectus for UCITS and AIFs (alternative investment funds).

And the second part consists of presenting figures to be produced in the annual reports, or in the KID³ for investment funds.

This kind of reporting is now mandatory. Over time, non-financial data has become just as important as traditional financial data. It’s no longer just a report that's good to have any more. It’s a regulatory requirement.

What does this reporting imply and require in terms of preparation and resources for asset managers?

Asset managers and management companies are affected as financial market players at the corporate or the entity level, as well as in terms of the financial products that they set up, manage or market to investors. They have to produce information such as the remuneration policy with regard to sustainability (that’s Article 5 of SFDR) and, for financial products, they have to provide ex-post figures that will be included in the periodic reports intended not only for the national and European authorities but also for the public.

The first challenge is being able to interpret the so-called “Level 1” regulatory text as accurately as possible, while trying to juggle that with the other regulations affecting sustainable finance, in order to find synergies when introducing tools and IT developments and to avoid unnecessary repetition and, in particular, costs.

On this first challenge, what are you thinking about?

I’m thinking mainly about TCFD Reporting⁴, which is talked about a lot but still doesn’t have a legal framework and isn’t a regulatory requirement. This Task Force on Climate-related Financial Disclosures is an initiative launched by the Financial Stability Board (FSB) or, as it’s known in French, the "Conseil de Stabilité Financière". And this TCFD Reporting is set to be mandatory in 2025.

The second challenge, and it’s an important one, is that of available data. To be able to produce it, you need to find it, which is far from an easy task, even if traditional providers of equity indexes like MSCI are working flat out to meet the need. In fact, listed and unlisted companies with more than 250 or 500 employees need to build the data requested and then disclose this non-financial information.

As for unlisted securities, for private equity funds or real estate funds, which are also subject to SFDR, what do we do?

Add to that the lack of harmonisation or standardisation, in terms both of a universal definition of sustainability risk and of a methodology for correctly assessing E, S and G criteria.  The EU’s “Taxonomy Regulation”, on the other hand (Regulation 2020/852 of 18 June 2020), for example, does not, take into account the S criterion for “social” in the six environmental objectives that it has set.

The technical standards have not been published yet. When will they come into force and can they affect the preparation of asset managers?

Not completely, anyway. An attempt at a supposed final version was published on 2 February 2021, followed by a letter from the ESAs⁵ asking the European Commission for certain clarifications on Articles 8 and 9 in relation to the “Taxonomy Regulation” on green finance in particular. Meanwhile, a consultation of the ESAs was launched on 17 March 2021. The responses received up to 12 May 2021 will be used to propose an actual final version for the return to work in September 2021.

If all goes well, the only thing remaining will be for the European Commission to endorse these regulatory technical standards for implementation initially scheduled for 1 January 2022, although it will probably be postponed.  Until then, asset managers, management companies and financial market players will be trying to find “temporary solutions” so they can align themselves at least a little with SFDR and the required reporting procedure.

SFDR¹: Sustainable Finance Disclosure Regulation
ESG²: Environmental, Social, and Corporate Governance
KID³: Key information Document for investors
TCFD Reporting⁴: Task Force on Climate-related Financial Disclosures
ESAs⁵: European Supervisory Authorities