* Funds, firms must disclose more ESG information
* March 10 first key date for disclosures
* Concerns about data, some funds opting for caution
By Simon Jessop and Kate Abnett
LONDON/BRUSSELS, March 9 (Reuters) - For money managers and
advisers keen to market their sustainable investing credentials
to European clients, going green is about to get a lot tougher.
Under a suite of new EU finance rules due to be rolled out
in stages, beginning on March 10, firms including fund houses,
insurers and pension funds that provide financial products or
services in the European Union will have to begin disclosing how
sustainable they really are.
The new EU legislation, called the Sustainable Finance
Disclosure Regulation (SFDR), aims to help drive 1 trillion
euros ($1.19 trillion) into green investments over the next
decade, iron out the patchy climate-related information
currently provided by financial market participants, and give
firms with genuinely sustainable products an edge.
"The crucial point is that this covers any entity or
financial product," said Lucien Firth, a partner at law firm
Simmons & Simmons. "It doesn't matter if you market all of your
products as sustainable or none of them – it covers all of
them."
The SFDR rules should make it harder for market participants
to talk up environmental credentials without following through
with action, so-called 'greenwashing', and could also determine
how big a slice firms can win of the fast-growing market for
products with a focus on environmental, social and governance
(ESG) issues.
Demand to invest in ESG funds jumped last year, driving
assets under management up 29% in the fourth quarter from the
prior quarter to nearly $1.7 trillion, according to asset
management industry tracker Morningstar.
"Those that already have a good offering in place are going
to stand to benefit," said Alexandra Mihailescu Cichon,
executive vice president of sales and marketing at ESG data firm
RepRisk.
DISCLOSURES
Set to roll out in several stages over the next two years,
SFDR contains reporting obligations at both the company and
product level, although investment managers say regulators'
last-minute release of final details of some of the rules is
hindering their preparations.
From this week, all funds must disclose in their
pre-contractual information how they factor sustainability risks
into their investment decisions.
Additionally, those funds promoting environmental or social
characteristics, or sustainability objectives, must explain both
in their marketing and on their websites the objectives and how
they plan to meet them.
Firms must also give an assessment of the main negative
impacts their investments will have on the environment and
society, or explain why they have not done so. From June, firms
with more than 500 staff will be required to report the impacts.
"Any sustainability-related claim by a financial product
must be well justified," a European Commission spokesperson
said. National financial market authorities will enforce
potential penalties for non-compliance.
Andy Pettit, director of EMEA policy research at
Morningstar, said the rules would "go a long way on the
greenwashing front... (it will be) much easier to compare
different products."
Within funds, greenwashing could include one that is
marketed as 'sustainable', but which includes lots of companies
with high carbon emissions. The lack of a firm definition of
greenwashing means it is often in the eye of the beholder.
From March 10, funds will also begin deciding whether to
label themselves as an Article 9, 8 or 6 fund - fully focussed
on sustainable objectives; fully or partly focussed on
environmental, social issues or sustainability issues; or not
focussed on sustainability, respectively - with a hard deadline
to do so by the end of 2021.
Article 8 or 9 funds will eventually have to make additional
disclosures about what their sustainable objectives are, and
from next year report on them against a set of granular
sustainability criteria.
Disclosures at a company level will also expand to include
data specified by the EU, such as CO2 emissions and water usage
across an investment firm's entire investment portfolio.
Mike Everett, governance and stewardship director at
Aberdeen Standard Investments, said his team had analysed all
the company's products, updated pre-contractual documentation,
secured regulatory approval and notified clients of the changes.
The company would also publish additional company-level
descriptions of its ESG process and policies and details of how
the fund managers consider adverse impacts in the investment
process.
"These developments require significant effort and
management, but are necessary in order to meet the requirements
of the regulation," Everett said.
ILL PREPARED
Many other firms, however, have yet to get to grips with the
rules, according to fund servicing firm Apex Group, which
pointed to a recent client webinar where just 17% of the
audience said they felt fully prepared to meet the rules.
While EU regulators have yet to confirm some of the data
that asset managers will need to provide to back up their
sustainability claims, there is also concern that some data does
not even exist.
Under the EU's current Non Financial Reporting Directive,
for example, smaller companies do not have to provide the same
level of data as larger companies on factors such as carbon
emissions and boardroom diversity - which could make it tougher
for a small-cap fund manager to provide evidence of its
portfolio's sustainability under SFDR.
Given the uncertainty, some investment managers are proving
reluctant to commit to labelling themselves as fully sustainable
and may wait until later in the year before finally deciding
whether to define themselves as an Article 8 or 9 fund.
"Investors are put in a difficult position as (some
company)data needed to report on ...(the) mandatory indicators
are not readily available from their investee companies," said
Anna Hirai, Co-Head of ESG Research at consultants SquareWell
Partners.
For Neil Robson, financial services and funds partner at law
firm Katten Muchin Rosenman, the greater transparency provided
by the new rules should help drive change and potentially expose
any lack of action at odds with funds' green claims.
"Despite the green agenda being front-and-centre in the
general media, many fund managers are still following a purely
financial, profit-led strategy without any particular ESG
focus."
($1 = 0.8418 euros)
(Reporting by Simon Jessop and Kate Abnett
Editing by Susan Fenton)