Asset managers voice concerns on regulatory approach to ESG

Despite industry consensus that regulators need to introduce ESG rules, asset managers are urging them not to rush or be inflexible.

By Charles Gubert

Exactly 12 months ago, the European Commission (EC) published a 10-point action plan on sustainable finance. The objectives were clear, namely to create a regulatory framework enabling more funding from asset managers and institutional investors to be funnelled into companies and industries which have reputable environment, social, governance (ESG) track records. If the EC gets its way, the legislation underpinning sustainable investing will be phased in between 2020 and 2022, a timeline which some experts believe is unrealistic.

“While the industry is incredibly supportive of the EC’s sustainability initiative, the regulation covers a lot of ground, and the timelines are ambitious,” said Sabine Dittrich, global head of regulatory intelligence at UBS, speaking at the Association of the Luxembourg Fund Industry’s (ALFI) European Asset Management Conference. “There is a risk regulators – who are under serious time pressure – could make mistakes, and the goal of the reforms – principally to direct investments into sustainable finance – will not be achieved.”

The proposals require asset managers to integrate sustainability risks into their investment processes and report on how they adopt ESG in their portfolios to underlying clients. In addition, the EC also confirmed it will create an ESG taxonomy, a measurable benchmark to act as a reference point for impacted managers and investors.

Henrik Pontzen, who heads up the ESG business at Union Investment Institutional GmbH, said it was crucial the rules were flexible so as not to impede or shoehorn sustainable investing at asset managers.

While the European Securities and Markets Authority (ESMA) has said it will be proportionate when applying the rules, there have been calls from some MEPs for regulators to be more prescriptive. In particular, experts warned regulators must ensure the taxonomy is carefully balanced. “Regulators need to be prescriptive to an extent when defining the taxonomy but they must also be sufficiently flexible to allow for innovation,” said Marie-Laurie Schaufelberger, product specialist at Pictet Asset Management.

Furthermore, she said it was critical the taxonomy’s introduction was not rushed, but pushed through gradually to allow the industry to familiarise itself with the rules. There are growing concerns too about ESG reporting to clients, as managers express reservations about how they accurately measure highly subjective, non-financial sustainability risks. The lack of available quantifiable data on ESG is not helped by the fact that many firms providing ESG ratings on companies do not have a shared methodology, said Schaufelberger.

Another problem is that the definition of sustainability is not harmonised across member states, in what could produce cross-border arbitrages and different interpretations about what constitutes as ESG. If this is not fixed, then asset managers’ approaches towards sustainability will become disjointed within the EU. Even though there is industry consensus that regulators need to introduce ESG rules, the requirements cannot be rushed nor should they be inflexible.