The first stage of the EU’s Sustainable Finance Disclosure Regulation (SFDR) came into force on March 10. Funds Europe asks industry experts whether it goes far enough in snubbing out greenwashing.
Adam Gillett, head of sustainable investment, Willis Towers Watson: We don’t believe there is a simple, single intervention which will prevent greenwashing, and therefore see SFDR more as a potentially helpful piece of the puzzle. The regime’s true impact on greenwashing really remains to be seen.
Greenwashing is often presented as quite binary, whereas the reality is more subtle, and has as much to do with aspects like culture and industry incentive structures, as it does with issues more explicitly addressed via SFDR like disclosure and transparency. Therefore there is perhaps always going to be a limit to which regulation such as SFDR can truly ‘prevent’ greenwashing.
It is also worth differentiating between more ‘unintentional’ greenwashing which often comes down to an expectations gap between investors and providers, and the greenwashing which is more ‘intentional’ as individuals and organisations look to over-claim, over-attribute, and over-sell what they are actually providing. The former can be largely addressed with mutual understanding set up-front in a relationship, and clear and honest reporting and communication thereafter. The latter form clearly is problematic, and corrosive to long-term trust and credibility. In this respect, we believe that there is a need for careful and detailed research and due diligence – combining qualitative and quantitative elements – to help address greenwashing.
Our research process reflects this need, including for example a specific focus on culture, which can help get beneath the surface of what is sometimes a fairly superficial discussion around greenwashing, and uncover who is really walking the talk.
Dr Henrik Pontzen, head of ESG, Union Investment: The SFDR makes an important contribution to form a sustainable future. However, much of the necessary data is not yet available. For one thing, the EU taxonomy is not yet complete. In addition, companies are not yet obliged to report their taxonomy-compliant turnover. Therefore, it will not be possible for broadly diversified mutual funds to report high taxonomy ratios on this data basis.
For the concretisation of the SFRD requirements (regulatory technical standards), the European supervisory authorities have only published their final drafts at the beginning of February 2021, which still have to be finally adopted by the European Commission in the coming weeks. Therefore, their implementation has been postponed to probably 1 January 2022.
In addition, the economy is not yet completely sustainable. Instead of investing exclusively in companies that are already very sustainable, we as investors can achieve a much greater impact if we also make brown companies greener. When companies credibly set out on the path of sustainable transformation, it benefits the environment and investors alike.
Julian Ide, head of Emea distribution, Franklin Templeton: The significant growth in investor demand for ESG solutions and subsequent response from asset managers has created a crowded environment, which makes it harder for investors to assess ESG credentials of funds and the asset managers who create those products.
The new regulation is about providing more transparency and authenticity for our clients—eliminating examples of ‘greenwashing’ or those products where sustainability is not truly embedded into processes. Investors want their provider to become more motivated in telling investors how they are integrating ESG factors into their business strategies and identifying new products, which puts sustainability at the top of their requirements. With the advent of increased sustainability-related disclosures being made available in the public domain, which should be published on websites, this should provide investors with verifiable requirements for sustainability claims.
Jihan Diolosa, head of responsible investing Emea, Russell Investments: SFDR will go some way towards preventing greenwashing - improving transparency and comparability of disclosures about sustainability-related features of products in a standardised way. However, an element of caution is also needed and allocating to funds based solely on this new classification may not be advisable at such an early stage.
The limitations and challenges associated with some aspects of key data mean that some robust ESG processes do not fit neatly into the Article 8/9 classifications. Just because a fund manager isn’t working to a defined E, S or G metric (individually or in combination) does not mean they do not have a good ESG process in place.
These factors might be considered in decision-making but may not naturally translate into prescribed product disclosures. We fully expect things to evolve but, in the meantime, investors need to proceed with caution so as not to rule out those managers that apply vigorous ESG processes.
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