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JTC Sustainability Services Team Examine Impact of Proposed SFDR Review

A collection of member associations from across the European Union’s financial sector recently called for a delay to what they perceive as “quick fixes” to how asset managers label sustainable investment funds.

The statement came from a group which included the European Banking Federation, EFAMA, Insurance Europe, AIMA, and the Association for Financial Markets in Europe, asked the EU to consider a wider review in the first instance to ensure a “holistic” approach.

Members of the JTC Sustainability Services team examined the proposal and its likely impact on the financial services:

Currently the European Commission are reviewing suggested changes to the RTS [Regulatory Technical Standards] (including changes to PAI indicators and other technical issues). The European commission is also undertaking a broader review of the SFDR legislation.

Gregory Yianni, Senior Manager – Sustainability Services, said:

“There is a consensus that any specific changes to the SFDR legislation should be made alongside this ‘holistic review’ and not considered in separate silos. If they are not considered side by side the worry is that this will reduce reliability in the disclosures and confidence placed in them by investors.”

David Vieira, Group Head of Sustainability Services, added:

“Delays like this can be damaging for the wider ESG and sustainability agenda in the sense that they create uncertainty and can give the impression of a disorganised, or at least unaligned, industry. While we would always want to see the best final outcomes, at this stage delays just create more questions for the sector and for investors.”

Reputational Damage

There are some concerns particularly from asset managers and investors not to ‘rush’ changes and create further potential impacts in the future.

If anything, providing a delay and providing a broader assessment of the legislation could add further clarity which would be well received from investors and asset owners/managers on their obligations.

Having sufficient time to action any of the changes will also be critical so institutions captured by SFDR have time to implement them and analyse underlying data.

Gregory said:

“Some of the proposed changes by ESA for RTS level 2 will include adding more social indicators and streamlining the disclosures around PAIs. Other items include improvements to the ‘Do no significant harm’ disclosure (DNSH) and simplifications of the pre-contractual and periodic templates.”

“If these changes are confirmed it should provide more clarity around PAIs and in an ideal scenario, make Article 8 disclosures more transparent and hopefully more straight forward. With this further clarity this could lead to an increase in Article 8 funds ‘upgrading’ from Article 6.”

In a recent interview, Louis Lamotte, Managing Director – JTC Global AIFM Solutions S.A. – Luxembourg, talked about the specific impact within the jurisdiction:

“Luxembourg businesses have already invested significant resources in improving their ESG reporting and transparency and are going to continue to maintain a competitive advantage over those that have not yet done so, especially if the delay prolongs the implementation timeline for the new rules.

“It’s important to note that investors and stakeholders increasingly consider ESG factors when making investment decisions, regardless of any delay. That being the case, Luxembourg funds may face pressure to maintain or even enhance their ESG performance in any case, despite any delay in regulatory requirements.”

David concluded:

“As a FTSE listed company with a strong track record in governance, we believe that we are well placed to help clients navigate this uncertainty. Of course, we would welcome clarity and consensus across the financial services industry in order to keep sustainability front of mind and not kick the issue down the road.”

The European Commission has not responded on the financial sector’s statement.