Moving sustainable finance disclosure beyond box-checking

Following last week’s blogs on Building Bridges Week and ‘greenwishing’, we’ve been thinking about the crucial role played by the private sector in leading investment towards a net zero future. In a Building Bridges panel discussion about whether data can prevent greenwashing, the conversation turned to how rigid legislation should be, and how investors might meet and exceed requirements for their advantage.

Pressure is mounting – regulatory, market, and stakeholder – so what can fund managers do to stay ahead and effect real change? In this blog we will explore the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy, and consider ways of advancing strategy in the most impactful way, as well as the tools needed to do so.

What is the SFDR?

SFDR, effective from 10 March 2021, sets out rules for classifying and reporting on sustainability and ESG factors in investments. Applying to financial market participants, the SFDR aims to provide a ‘level’ and consistent approach to sustainability-related disclosures to investors within the EU’s financial services sector. But a year and a half on, fund classification (6,8 or 9, depending on sustainability characteristics), has been accused of confusing and misleading investors.

Just last month it was reported that a quarter of Article 9 funds were at risk of being downgraded due to research showing they failed to live up to the strictest ESG classification. Earlier this year Morningstar found that only 43% of Article 8 and 9 funds cover principal adverse impact (PAI) consideration. With this in mind, it is safe to say that the data is currently uneven.

Challenges to the EU Taxonomy

The EU Taxonomy provides performance criteria, defining which activities can be considered ‘green,’ and which can’t. The regulation came into force on 12th July 2020, with a first delegated act applicable since the start of this year and a second on its way. 

The first series of activities labelled as sustainable in the taxonomy included bioenergy, bio-based plastics, and chemicals used to make plastics. Certain investments in gas have subsequently been included under the category of “transitional economic activities”. In response, a number of civil society organisations, and last week, the Austrian government, have launched legal action. They argue that this inclusion is at odds with EU Climate Law and international commitments under the 2015 Paris Agreement. While signalling a crucial start of far-reaching mandatory sustainability disclosure, criticism around limitations and designations can’t be ignored. 

Box-checking won’t cut it

Fund managers should adhere to global sustainability goals (e.g. UN Sustainable Development Goals) that are truly focused on change that is positive for the planet, rather than simply ticking a legislative box. As discussed, this is especially relevant for now, while implementation of the improving legislation is not yet adequate for triggering the rate of change required to hit sustainability goals. With the low-hanging fruit largely picked, it is vital that adverse – as well as positive – impact is measured to make real progress.

With Topic/Goal based engagement and integration with third party ESG data providers, SI Engage gives asset managers a better insight into their sustainable investment and engagement strengths and weaknesses.

Reach out today to discuss the myriad of ways SI Engage can enhance your engagement tracking and reporting.

 

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