Challenges related to data collection, validation and distribution show why a digital solution is paramount, writes Paul Bureau, head of business development & client service at Manaos.
Although deadlines are impending for the European ESG Template (EET), asset managers are not yet fully prepared to meet the more arduous and complex data obligations of the different European regulations. This only reinforces the need for market participants to modernise and embrace sophisticated digital tools.
The latest study by FE fundinfo demonstrates the obstacles. It shows that around half of asset managers are “still grappling” with the issues and have yet to submit environmental, social and governance (ESG) data on their funds. For this reason, and following pressure from asset managers, the deadline for ESG changes to MiFID II has been pushed back to January 1, 2023 (from August 2022).
The EET is not a regulatory initiative but is comparable to the European MiFID Template (EMT) and the European PRIIPs Template (EPT) in its ambition to produce a standardised framework. The main difference is in the vast number – 580, in fact – of mandatory, conditional and optional fields to be populated. It also includes additional country-specific requirements making things more complex at a fund and underlying individual share class level.
Like its other template equivalents, the EET was developed by industry consortium Financial Data Exchange Templates (FinDatEx) to facilitate the exchange of data between product manufacturers and distributors across the financial services sector to provide a regulatory overview.
In this case, it covers the Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR) level and the relevant provisions of the EU Taxonomy Regulation and delegated acts of the revised MIFID II and Insurance Distribution Directive (IDD). Its target audience is insurers, distributors, fund of funds and other financial market participants, financial advisers, fund managers and end investors.
There are two key regulatory deadlines for the submission of the EET. The first is the sustainable preferences of clients for MiFID II and IDD, which was to come into force initially on August 2, 2022, but was pushed back to January 2023. The ESMA published a note asking for this to be delayed to January 2024 to account for the difficulty of gathering all the required data. This means advisers must identify client ESG preferences and manage portfolios accordingly. There will also be changes to firms’ product governance and risk management practices.
“In the past, asset managers may have been poring over excel spreadsheets, calling around for the requisite data or using one or two providers...”
Although some financial product advisers and distributors have already gone down this route, sustainable preferences are now mandatory as part of the European green agenda to direct capital to companies most active in the transition to a low-carbon, inclusive economy.
Determining the suitability of funds may prove difficult as it means the distribution platforms and insurance companies will need these funds’ ESG data. If they do not have access to this information, they will not be able to promote these funds.
The second deadline is January 1, 2023, when data has to be submitted for the SFDR and the EU Taxonomy Level 2. The EET is especially relevant for Articles 8 or 9, classified as light and dark green funds, respectively, and the more traditional Article 6 funds. Although Article 6 funds are unlikely to meet clients’ sustainability preferences, they are expected to be reported in the EET.
EET and Data
In general, the EET will enable manufacturers using underlying funds/financial products, such as funds of funds, and distributors to fulfil their SFDR reporting requirements and principal adverse impact (PAI) statement at both the product and company level. The PAI regime requires financial market professionals to provide extensive disclosures on various ESG-related matters, including environmental and social indicators.
This translates into investment products, including Ucits, alternative investment funds (AIFs), pensions, insurance-based investment products and managed portfolios, having to detail how they consider the mandatory and optional PAIs if labelled as Article 8 or 9. Currently, the PAI demands the most column fields – 359 – followed by screening criteria, product or financial instrument data, manufacturer, data set information and country-specific information.
Given the complexity and data demands, FinDatEx had recommended market participants meet intermediary deadlines of June 1, 2022, for MiFID and IDD and November 1, 2022, for SFDR and the Taxonomy in order for there to be enough time for the collection, computation and production of the required initial data fields.
This, as highlighted in the FE fundinfo study, has not been attainable and the task will not become any easier as the number of fields is expected to increase once the SFDR requirements are live. In the past, asset managers may have been poring over Excel spreadsheets, calling around for the requisite data or using one or two providers. Today, that is no longer an acceptable modus operandi. They do not have the time to use manual resources or the resources to build new solutions.
One of the issues is that ESG is a relatively new investment trend, and they have not had to provide these types of granular data sets in the past. It has been well documented that the ESG landscape is fragmented with disparate data sources, rating agencies and indices. Even internally – around two-thirds of the information for the EET can only be provided by the asset manager – it is still difficult to extract across an organisation.
This is why the industry needs cost-effective, open-source, digital flexible tools offering a comprehensive picture of their funds. They have to be able to gather the information from internal and external sources, calculate it at the portfolio level, update when necessary and adapt to new standards seamlessly.
This was one of the key drivers behind the creation of Manaos, a plug-and-play data marketplace launched by BNP Paribas Securities Services connecting clients with a wide range of third-party ESG data vendors and fintechs. Through its new generator app, Manaos allows asset managers to create the EET structure from scratch. It can automatically generate a template where information is not only dropped into the right columns but also subject to an automated quality check to ensure the file is regulation-ready.
Manaos also does not rely on a handful of data providers but partners with the best-in-class firms to calculate the taxonomy alignment and PAI indicators for each fund. The asset manager can check the EET and has the option to disseminate it to distributors, fund selectors, institutional clients and data platforms.
Although in time, the raft of EU regulations will create a more standardised data environment, the challenges of collection, validation and distribution will not disappear, which is why a digital solution is paramount.
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