SFDR 2.0: A Game-Changer in Asset Management

Much could unfold between now and year’s end, yet the future of SFDR 1.0 seems increasingly shaky.

As we highlighted in previous articles, the European Commission’s webinar honed in on the shortcomings of “SFDR 1.0” and potential alternatives, especially “labels” inspired by the British FCA’s initiative.

Key takeaways include:

– 66% of webinar attendees feel the current legislation adds confusion, heightening greenwashing risks.

– A majority (60%) anticipates that the updated “SFDR 2.0” should encompass all financial products, sustainable or not.

– A striking 57% of participants did not suggest an adaptation to the existing rules.

Verena Ross, heading ESMA, pointed out that sustainability data from SFDR 1.0 often mystified individual investors. This was echoed by the French Ministry of Economy’s representative, advocating for a labeling system and openly doubting its compatibility with the current classification (the debated articles 8 and 9).

Webinar sentiments hint at a mutual desire among regulators and professionals for a thorough SFDR overhaul to reach a true labeling system. This shift would reshape how ESG funds are managed and how their “sustainability” is conveyed.

SFDR 1.0 remains effective until the new commission’s 2024 election. Yet many in the sector believe its fate is predetermined. While the regulation began with noble aspirations, it possesses significant gaps. The primary challenge lies in marrying heightened financial constraints with an “extra-financial” benefit clients barely recognize.

Furthermore, European asset management faces a daunting dichotomy. On one hand, European sector giants abide by “SFDR 1.0” directives. Conversely, they compete globally with firms like Blackrock, which follow differing ESG guidelines.

Europe, despite pioneering sustainable finance, must confront two truths:

1. Asset management titans are predominantly Anglo-Saxon, with Blackrock and Vanguard jointly managing $16 trillion, versus Amundi’s $2.1 trillion as Europe’s top asset manager.

2. Financing the sustainable transition demands public and private fund collaboration. To date, SFDR 1.0 hasn’t met this mandate.

Key global ESG regulation announcements are imminent, including conclusions from the first EU-UK financial regulation forum and the UK’s impending sustainable finance rules. In the US, the SEC is to adopt the Final Climate Change Disclosure rule by October 31st – at the latest. If the SEC follows this timeline, listed US firms would need to file their climate disclosures for fiscal year 2024.

What does this mean for European asset managers?

European national labels (ISR, TIBI, Greenfin) may remain local endeavors, fading away under major players’ polite indifference or, at best, becoming “badges” that offer little but adorn brochures and reports.

Conversely, the UK’s ESG approach, aligning with both the EU’s ESRS and ISSB-SEC, emerges as the sustainable finance gold standard, delineating global financial industry benchmarks.

An ESG investment process revolution must accompany regulatory shifts. Asset Management Companies must establish their ESG analysis process—requiring significant resources. Merely incorporating external analyses or ratings, like those from MSCI or Sustainalytics, will no longer suffice, even if enhanced with advanced algorithms or methodologies that weigh criteria deemed vital by the management company.

Our industry professional interactions can be distilled into five distinct viewpoints:

1. Confident Optimism: Those feeling exempt from this shift, reassured by a clear product range.

2. Expert Assurance: Firms with ESG experts, confident in their adaptive capabilities.

3. Cautious Wait-and-See: Some reserve judgment, overwhelmed by new challenges’ complexity.

4. Strategic Anticipation: For others, SFDR 2.0 is a profound shift, necessitating rethinking strategies to maintain or enhance market positions.

5. Strategic Pessimism: Some view these changes as a formidable threat to their competitiveness, even pondering exit strategies ahead of the feared upheavals.

Where do we stand? Unequivocally, we align with the fourth viewpoint. The ongoing SFDR revamp is more than mere regulatory tweaking; it’s a foundational asset management reevaluation, especially concerning ESG funds.

Thus, we strongly urge each Asset Management Company, especially if ESG-committed, to seize this moment to refine its strategic vision. Key questions include:

Vision & Commitment: What does it mean to be a leading sustainable finance player today?

Means & Resources: Do we have the necessary tools to match our ESG ambitions?

Strategic Redefinition: How can we rethink our stance through the sustainable finance lens?

Client Targeting: Which clients should we focus on and with what offerings?

Organization & Process: How should teams and processes be structured for optimal efficiency?

Communication: How should we discuss these changes, both internally and with clients and partners?

Though the future remains uncertain, it’s brimming with potential. One thing’s clear: SFDR 2.0 won’t be a mere formality. It demands profound introspection and proactive adaptation. It’s upon us to harness this chance and shape the future of sustainable finance.

L’Espresso des marchés du 20 Octobre 2023
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