New reporting requirements, introduced to improve transparency around sustainable investments, are to become mandatory in the European Union from January 1st.
The Sustainable Finance Disclosure Regulation (SDFR) aims to prevent greenwashing and make it easier for investors to find out about a fund’s ESG credentials, including its environmental impact.
From early January, wealth managers will be required to make pre-contractual disclosures for products that promote ESG characteristics, as well as online disclosures around their funds.
“It’s a new disclosure system,” said Sandra Rockett, Irish Life’s head of asset and corporate sales.
“It is intended to make it easier for clients and their advisors to identify and compare funds that promote sustainability characteristics, such as a lower carbon footprint, or funds that make sustainable investments, such as renewable energy funds.”
The regulation was introduced in March 2021 and classified financial products into three separate categories based on their ESG impact.
However, with further clarification becoming mandatory in the coming weeks, Ms Rockett says there is now “much stricter guidance” on what defines each fund’s rating.
“There’s clarity and much greater transparency and greater duty in terms of the disclosures that wealth managers are required to make,” she said.
An Article 6 fund under SFDR is a fund that does not have a direct sustainability area and only deals with ESG risks.
Meanwhile, an Article 8 fund is one that promotes ESG characteristics.
“An Article 9 fund is clearly in that scope with a very specific sustainability objective,” added Ms. Rockett.
For these funds, that objective is “the primary objective beyond risk and return.”
As classification guidelines become more detailed, many money managers are now facing a “fund recalibration”, with some being forced to downgrade financial products from Article 9 to Article 8.
“Any manager, distributor or fund provider based in the European Union must adhere to these standards, regardless of where they invest,” Ms. Rockett said.
A Bloomberg report earlier this month revealed that ESG fund downgrades have now reached at least $125 billion as asset managers like BlackRock, AXA and Amundi react to the new regulation.
EU Commissioner Mairead McGuiness said earlier this month that the regulation should be “a disclosure system” rather than “a labeling system”.
She also acknowledged that there have been some criticisms of the regulation due to the ongoing confusion.
“Concerns have been raised about how some of the fundamental concepts of SFDR should be understood and applied, and I am very aware of the concerns within the financial sector regarding legal and reputational risks,” she said.
“Of course, investors, regulators and civil society are concerned about the lack of clarity, which creates opportunities for greenwashing.”
She added that the European Commission will address wealth managers’ concerns in the new year with some clarifications to provide further insights when the new technical standards come into effect.
https://www.independent.ie/business/irish/new-eu-disclosure-regime-aims-to-end-greenwashing-of-investments-42249130.html The new EU disclosure system aims to end the “greenwashing” of investments