The European Commission has provided further details on the implementation of the SFDR regulation. In France, the Comité du Label ISR (SRI label committee) has unveiled its draft overhaul, subject to consultation. These are new rules for asset managers to digest.
It had been awaited for months. The European Commission’s response to the questions formulated by the European Supervisory Authorities (ESAs) in September 2022 was published on April 17.
One of the clarifications awaited by all fund managers was a detailed definition of the notion of sustainable investment, central to the SFDR regulation.
Indeed, from January 1, 2023, all fund management companies must mention in their pre-contractual documentation the proportion of sustainable investment contained in their Article 8 or 9 funds. In addition, funds categorized as article 9 must display a sustainable investment ratio of 100%. This constraint prompted many players to downgrade some of their funds to article 8 status.
As a reminder, the European text defines a sustainable investment as an investment in an economic activity that contributes to an environmental or social objective, without causing significant harm to other environmental or social objectives (DNSH principle – do no significant harm) and in a company that applies good governance practices.
These principles are open to multiple interpretations. The Commission’s response is a non-clarification,” warns Mathilde Dufour, Head of ESG Research at Mirova. The only real clarification is whether the share of sustainable investment to be taken into account at fund level corresponds to the share of a company’s aligned activities, or whether the company can be accounted for in its entirety. The latter is the case.
The approach is therefore binary. “If part of a company’s sales contribute to an environmental or social objective, then the entire company can be considered a sustainable investment,” explains Nathaële Rebondy, Head of Sustainability for Europe at Schroders.
Minimum thresholds for activity contributing to these objectives should be set by managers, but these have not been given.
Managers are free to choose
Another question on the minds of fund managers: does the notion of sustainable investment relate solely to a company’s activity, or also to its practices?
Surprisingly, both forms of contribution are permitted. “It’s easier to demonstrate through activity, but if we take the social dimension, the positive impacts are much more often linked to the way we operate than to the nature of the activity”, comments Mathilde Dufour.
Lastly, the Commission points out to management companies that reporting on PAI indicators (main negative impacts), used to carry out the DNSH test, cannot be limited to figures.
Measures must be taken to reduce the impact of the portfolio over time,” says Nathaële Rebondy. This can involve commitment and voting.”
The absence of a coercive methodology is reassuring for the profession, as everyone can adopt the approach that seems most appropriate.
“The European Commission is (re)-positioning the SFDR regulation in line with its original raison d’être, namely as a transparency regulation, and not as a new form of labe-llization”, says Clément Bladier, Chairman of the NEC (Net Environ-mental Contribution) Initiative.
What’s more, the alternative to this vision could have been disabling for asset managers. The alternative would have been to stick to the taxonomy, which would have been too restrictive,” points out Mathilde Dufour. It would have spelled the end for Article 9 funds, which must hold 100% sustainable investment.”
All the more so as the taxonomy is still far from complete, and companies are not yet communicating on the entirety of this benchmark.
Currently, companies have to communicate their eligibility for the first two pillars of the text, and their alignment in 2024,” explains Nathaële Rebondy. This lack of data means that we don’t report on taxonomy within our funds, especially as the estimates we can obtain from data providers are not sufficiently reliable.”
The other disadvantage of an overly prescriptive text would have been to direct sustainable funds towards a restricted circle of values.
“If everyone adopts the same methodology, then we’re all investing in the same companies,” notes Nathaële Rebondy. And if this definition is very precise, then we focus on a handful of extremely virtuous companies. But what about all the others, those in transition?”
Despite this, the challenge remains great for asset management companies, who must meet their regulatory requirements. What’s missing is an educational aspect, a reading grid, to help managers fill in the pre-contractual appendix and their periodic reports,” says Sabrine Aouida, head of ESG expertise at WeeFin. They still find it very difficult to do this.
For example, out of 125 documents analyzed internally, we found that only 20% were correctly completed. Even asset management companies that are well advanced in this area can still find it difficult to transcribe their investment strategy into SFDR.”
The next version should be more complete, as management companies will have had more time to digest the texts and draft these appendices.
Exclusions for the SRI label
At the same time, asset management companies are faced with the challenge of changing the French SRI label. On April 18, the SRI Label Committee proposed its overhaul project, which was open to consultation until the end of May. It is based on three main points:
Increased selectivity (from 20% to 30% of the universe) and exclusions (coal and non-conventional fossil fuels in particular);
The requirement for double materiality in the management of labelled funds via PAIs and, finally, the systematic integration of climate policy. However, the idea of a label with several levels has been ruled out for the time being.
Some of the requirements, such as the higher selectivity rate and the exclusions above a sales level of 5%, are quite strict,” enthuses Sabrina Aouida. It’s a big step forward!”
However, it’s hard to please all the protagonists. It’s a half-hearted decision on the issue of exclusions,” says Clément Bladier. The Label Committee accepted the opinion of the Inspectorate General of Finance, which recommended excluding coal and non-conventional fossil fuels, without going any further.
Excluding all fossil fuels (conventional and non-conventional) would have sent a much stronger message about the level of climate commitment of SRI-labelled funds.” More broadly, Mathilde Dufour believes that “progress has not been commensurate with the stakes”.
In operational terms, the fund managers reject the proposal to take into account a minimum of 20% of each of the three dimensions E, S and G to ensure that portfolios are balanced across the three pillars.
“It’s a very SRI approach from the past, and in no way guarantees that we’re trying to avoid negative impacts on all dimensions”, comments Mathilde Dufour.
The same is true of Schroders. It’s not consistent with our tools and methodologies,” says Nathaële Rebondy. It would be preferable to have to demonstrate that all three pillars are taken into account, without resorting to arbitrary thresholds.”
At this stage, it is not known how many of the 1174 SRI-labelled funds will pass the filters of this draft benchmark.
————————————————————————————–
Source: Funds Magazine| 7 Juin 2023 | Aurélie Fardeau.
Read the article in PDFNathaële Rebondy, Head of Sustainability for Europe at Schroders.
Mathilde Dufour, Head of ESG Research at chewMirova.