- The SFDR is designed to improve and standardise investment firms’ ESG reporting, providing greater transparency for investors.
- However, the classification element of the regulation creates a hierarchy that could lead to a belief that Article 8 and 9 funds are always ‘better’ products than Article 6 funds.
- The design of SFDR, and upcoming MiFID rules that will require distributors to ask clients about their ESG profile, are likely to reinforce that trend, as Article 6 products will not be deemed suitable for a client with an ‘ESG preference’.
- Investors therefore need to be cautious of simply choosing funds that are categorised as Article 6, 8 or 9 and should, as ever, do their homework.
The SFDR is designed to improve and standardise investment firms’ ESG reporting and allow investors to assess and compare the ESG approaches of different investment funds – essentially, to provide greater transparency for investors and avoid ‘greenwashing’. Yet questions have been raised as to whether asset managers are clear about the consequences of categorising themselves as article 8 or 9, and the amount of information they will need to produce for it.
Indeed, classification is not the endgame but rather the first step of a longer journey. Starting in 2022, funds categorised Article 8 or Article 9 will need to publish highly standardized ESG factsheets that detail the fund’s ESG strategy, characteristics, benchmark and due-diligence policies. In annexes to fund prospectuses and annual reports, these templates will also include a KPI around alignment with the EU Taxonomy – a system for classifying ‘sustainable economic activities’ aligning with the Paris Agreement objective of carbon neutrality by 2050.
In this short Q&A, Harald Walkate, Head of ESG at Natixis Investment Managers and Corentin Couvidat, of Natixis Investment Managers’ Regulatory Affairs department, provide insight into how investors and advisors should read between the lines when assessing what SFDR means for sustainable investing.
Harald Walkate (HW): This system, in theory, is helpful for investors to compare funds. In practice, they need to be cautious of simply choosing funds categorised as Article 6, 8 or 9. The classification element of the regulation creates a hierarchy that could lead to a belief that Article 8 and 9 funds are always ‘better’ products. This is also caused by how Article 6 is drafted: it covers both funds that do ESG integration, without being promoted as ‘ESG Funds’ – which is what a majority of the market is doing – and funds that have no ESG approach at all. What the industry needs to avoid is a system where managers are incentivised to incorrectly label their funds as Article 8 or Article 9 to attract clients. If most or all funds are categorised as Article 8 or 9, the investor is no better off than before the regulation was implemented. In effect, this could actually incentivize the ‘greenwashing’ that SFDR is meant to counter.
HW: Implementing regulations such as these, in an asset management group with our size and complexity, requires the involvement of a great number of corporate functions and many of our investment affiliates. This has really helped us expand the circle of smart people who are engaged in ESG. It includes recognizing that it means different things to different people, debating how and when ESG considerations can be relevant to investment decisions, trying to come up with guidelines to affiliates on how to classify funds and how to label, or not label, products, and challenging the ESG team on our policy and convictions. It has helped us influence the internal debate more than any corporate policy or ESG working group ever could.
HW: It seems there were various drivers at the inception of SFDR, which have sometimes made it difficult to understand its main objectives, and how regulators want us to prioritize them – whether it is mobilizing more capital towards ESG goals, improving risk management, or tackling greenwashing. Yet, without a shared understanding of the problems and objectives, we fear that the proposed solutions are not optimally designed and, in some cases, might be counterproductive.
CC: Regulators have often said that SFDR categories should not be seen as labels, given they do not set ‘minimum standards’ for qualifying – in particular, as regards Article 8 funds. The design of SFDR, and upcoming MiFID rules that will require distributors to ask clients about their ESG profile, are, however, likely to reinforce that trend, as Article 6 products will not be deemed suitable for a client with an ‘ESG preference’.
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This communication is for information only and is intended for investment service providers or other Professional Clients. The analyses and opinions referenced herein represent the subjective views of the author as referenced unless stated otherwise and are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material.