The perils of building tools to help investors navigate fast-changing regulations were highlighted last week as Bloomberg unveiled enhancements to its product for assessing companies in accordance with the European Union’s Sustainable Finance Disclosure Regulation (SFDR).
No sooner had the updated data-packed technology been made available to the company’s clients than the EU’s leadership body, the European Commission (EC), announced new changes to the rules with the potential for far-reaching amendments later this year.
Fortunately for the financial data giant, the latest tweaks to SFDR have not had an impact on the new dashboard-based tool. Built on Bloomberg, ESG Book and Freedom House data, investors can interrogate companies’ alignment with the SFDR’s sprawling requirements. While SFDR applies specifically to funds, the Bloomberg solution enables the application of the regulation’s tests to individual assets.
Bloomberg’s Business Manager for Climate and Regulation, Nadia Humphreys said the EC’s changes to its approach to SFDR underlined the importance of creating a RegTech product that has in-built adaptability.
“What we offer the market right now is completely fit for purpose,” Humphreys told ESG Insight. “The difficulty with SFDR is it is a regulation under construction.”
No Rest
While SFDR has been in place since 2021, Humphreys said it has been difficult until now to build a useful assessment tool because the Commission and Supervisors continue to offer additional guidance and refine the technical requirements. That said, the introduction of level two reporting in January has brought little of the expected stability to the regulation’s evolution.
For instance, the requirement by funds to declare their level of sustainability – either level 6, 8 or 9 depending on the relative proportion of each fund’s assets that are dedicated to green or social objectives – has been accompanied by seemingly chaotic actions by funds.
Many firms that had declared their funds under the greenest definition – level nine – have downgraded themselves as the threat of censure over greenwashing has increased. Among the EC’s declarations last week was the softening of the thresholds that differentiate the three designations, which some expect will result in companies switching their fund designations again.
Harm Definition
Bloomberg’s SFDR solution has been released in time for funds’ first presentation of their Principle Adverse Impact reports (PAIs). These require fund managers to self-assess how their investments are affecting the environment and the communities in which they operate.
Currently, there are 14 mandatory PAIs on which reports must be made and several others that firms must select according to their investments. They cover climate and other environmental factors as well social themes, including human rights and labour laws.
At the moment, there are no hard and fast rules on how PAIs should be assessed; companies are asked to define the nature and extent of the harms they do. Humphreys said this is one of the most challenging parts of compliance because many funds are unsure how to go about it, and that this is a key part that the enhanced Bloomberg offering addresses.
“Our solution doesn’t say ‘look your carbon footprint needs to be lower’ or ‘it needs to be below a particular numerical value’ – it doesn’t tell you any of that,” she explains. “There’s all these freedoms that people really struggle with – they’d prefer a pass/fail click-button, but that’s not possible because there’s no single definition for what constitutes as harm. Instead, we are giving the ingredients list so fund managers can tailor their definition of harm and apply it to the companies they want to invest in.”
Added Context
Also, via the new reporting dashboard, investors can attach contextual information to their reports, enabling them to offer explanation around the metrics they present. It does this with reference to funds’ non-ESG benchmark against which they gauge their financial performance.
“It adds a little bit more flavour to the report. Not only can the asset owner see the performance of the fund using the PAIs, it can also see relative performance of the PAIs to the benchmark,” Humphreys said.
Bloomberg provides the lion’s share of data from its own datasets. But it has forged relationships with third-party provider ESG Book to source content on controversial weapons and UNGC protocol violations, also themes covered by PAIs.
With SFDR still undergoing change, and the conclusion of the ESA’s consultation expected in October, Humphreys said Bloomberg is ready to retool its latest product.
“We will continue to offer tools that meet our clients’ regulatory needs,” she said. “And that may mean adding more data points or removing certain data points, depending on what comes out in October.”
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