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Why Both Asset and Investment Managers Need to Think Outside the Box on ESG Regulations

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By Janine Hofer-Wittwer, CFA, Senior Product Manager, Financial Information at SIX.

A landmark report from the UN’s Intergovernmental Panel on Climate Change has shocked nations on a global scale. The findings suggest that the world is likely to reach 1.5C of warming before 2040 as a direct result of human activity, calling the entire world into action – none more so than investment managers. Regulations across Europe, such as the sustainable finance disclosure regulation (SFDR) and the EU Taxonomy, have focused the asset management industry on tackling the climate challenge, but with a delay announced to both is there any time to wait given these stark UN figures?

On 8 July 2021, the European Commission released the news that implementation of level 2 of the SFDR, also known as the Regulatory Technical Standards (RTS), was to be pushed out until 1 July next year. And in that same week, the first Delegated Act supplementing Article 8 of the Taxonomy Regulation was adopted by the Commission too.

With many firms coming to grips with their preparation (or lack of) for these regulations, the delay has at least given asset managers more time to comply with the reporting requirements under these new regulations. On the other hand, this also means that there is now more time to procrastinate. The future of finance is based on what happens now – firms have an obligation to consider material ESG factors, such as climate-change risks and impacts, as part of their investment processes going forward. But market participants across the board are still missing the relevant, verifiable ESG information they need to comply with SFDR requirements and prove the sustainable, long-term value of their investment decisions and products.

However, it is evidence like the alarming findings from the UN that justify the business case for complying with SFDR requirements as soon as possible in order to get ahead of the game. Also, while it is true that firms have been provided with some extra breathing room, the new deadline is still less than a year from now. So why not be ready before then? For firms to navigate the ESG landscape successfully, it is important to switch up their mentality and view the SFDR framework as a strategic business opportunity rather than a box ticking exercise.

The delays to the taxonomies

Taxonomy in particular create challenges for doing this, leaving firms prepping for the more immediate go-live for SFDR reporting without the detailed information such as the alignment of companies and their activities with the taxonomy being available.

While there are of course some discrepancies that will need to be ironed out, the key to success here is gradual implementation based on what has already been outlined under SFDR and EU Taxonomy reporting requirements. If investment firms already have these processes in place, these can then be built upon as and when the next set of regulations are introduced, making disclosure easier to implement moving forward. In the meantime, it is crucial that firms are pulling as much data from different sources, including alternative data, to create as full a picture as possible when formulating their portfolios and investment products.

Appetite for sustainable investment decisions will only increase from now. And a 6-month delay means nothing when you think about the pace at which financial markets move. These regulations provide asset managers with the opportunity to tap into what investors really want – being proactive when it comes to ESG disclosure will instantaneously improve the reputation and business opportunities of firms. So, firms need to think outside the box and get to work on gathering this relevant, high-quality data that helps comply with SFDR requirements accurately. Not only can this enhance your business, it also supports the extremely important world-wide push to combat the environmental challenge.

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