Author: Natacha Guerdat, Head of Research, Asteria IM
November 2022
Throughout 2022, new sets of rules and requirements have come into place simultaneously. From a quasi no man’s land to a full set of disclosures at firm, pre-contractual, investment strategy, marketing, and reporting levels. It can appear confusing, or even a compliance nightmare for numerous financial institutions.
As it varies between regions, Europe continues to lead. The objectives are to protect the investor by making sure the sustainability claims are accurate. This should support sustainable finance development in the long run.
Promotion of a sustainable economy
The European Commission has an ambitious plan to promote the transition towards a sustainable economy and improve transparency. In that respect, The EU taxonomy is a framework of contributing economic activities to six environmental and three social targets. Sor far only climate mitigation and climate adaptation have a set of aligned activities. Unfortunately, last minute inclusion of natural gas and nuclear power generation into the taxonomy has weakened the legitimacy of this framework.
Transparency and standardized reporting
The Sustainable Financial Disclosure Regulation (SFDR) applies to financial market participants in the European Union, which includes investment UCITS fund managers, RAIF alternative managers, insurers, and portfolio advisors. Its requirements also apply to third-country managers – such as Swiss managers of funds domiciled in the EU or investing on behalf of European investors.
It is a self-declaration process as to the level of sustainability commitment of the investment objective. It is accompanied by one administrative obligation: publishing information about this level of commitment at three levels:
- The weight of the portfolio pursuing sustainable investments
- The aggregated percentage of reported revenues from companies in portfolio generated from EU taxonomy eligible activities
- An aggregated set of environmental, social and governance indicators at portfolio level, the Principle of Adverse Impacts (PAI), which demonstrate how negatives incidents are avoided or reduced by companies held in portfolio.
This harmonized and standardized set of information will provide comparability. It will be up for investors to select the suitable solution and distinguish sincere commitments from opportunism and greenwashing.
Suitability and investor protection
The modification of the Markets in Financial Instruments Directive (MIFID II) came into effect in August 2022. Articulated on SFDR disclosures, it requires advisors to understand the sustainable investing preferences of their clients. It pursues three objectives:
- Encourage integration of sustainability into institutions’ risk management practices
- Support capital flows towards sustainable activities, including activities aligned with the EU Taxonomy
- Reduce “greenwashing” practices.
What is slow cooking in Switzerland?
Although there is currently no equivalent Swiss regulation, the Asset Management Association Switzerland has released, last September, a set of quality and transparency criteria for collective investments with sustainable credentials. It shadows the European regulation however far less constraining. Sustainable investment products are now required to provide clear information about their objectives, how they will deliver it and a harmonized reporting.
Although we still face divergent definitions and minimum standards all these regulations provide an interesting starting point to ensure comparability and assess the contribution to international goals such as climate.
To achieve this objective, similar corporate reporting in force. And only in a couple of reporting cycles will discrimination be possible. Then we will make sure capital is adequately allocated towards more fair and sustainable economic activities.
