EU may need to rethink rules on ESG, watchdog says

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Luxembourg ranks among EU member states ahead of bloc defining sustainability for retail financial products

Luxembourg ranks among EU member states ahead of bloc defining sustainability for retail financial products

A barge crosses the river Main with the skyline of the banks of Frankfurt in the background.

Photo credit: Boris Roessler/dpa

European market watchdogs are calling for a rethink of the region’s ESG investment rulebook after finding that the existing framework is misunderstood.

At issue is the tendency of fund managers and their clients to treat the EU disclosure regime as an ESG labeling system. As a result, investor clients often have the impression that funds within a particular disclosure category have positive environmental, social or governance outcomes, which they do not.

“Using the current sustainability disclosures under the SFDR as a ‘label’ can be misleading,” European Securities and Markets Authority Chairman Verena Ross told Bloomberg. As such, ESMA “supports the development of simple and clear information so that investors can make well-informed investment decisions,” she said.

Calls for clarity on the key pillars of the EU’s Sustainable Financial Disclosures Rule are consistent with amendments to the EU’s revised Markets in Financial Instruments Directive, which came into effect this month. This new requirement means financial institutions need to understand a retail investor’s ESG preferences and actually deliver on them.

Concerns that investors misunderstand existing rules find ESG increasingly attracting criticism.

Many prominent Republicans are beginning to argue that ESG is a threat to American society. On the other end of his spectrum, some ESG industry insiders question whether the move is tough enough to achieve its goals. Ross said the investor’s background surrounding ESG hit a cautionary tone, though he suggested he wasn’t affected by the noise so far.

“I don’t think we’ll see a significant ‘backlash’ against ESG investing in the EU,” Ross said. Still, “continued efforts are needed to strengthen confidence in sustainable financial products that are meeting investor demands.”

The European Commission started working on a common sustainability label for retail financial products more than three years ago, but has not yet reached a conclusion. Ross said in May that ESMA would likely support such a step. A number of his EU member states, including France and Luxembourg, already have such ESGs for several years.

Some large asset managers warn that retail investors are currently struggling to navigate the complex world of ESG as regulation remains inconsistent and incomplete.

“The situation is changing very quickly,” Fong Yee Chan, head of ESG strategy for Europe at Vanguard Group Inc., said in an interview. “In Europe, there is a huge amount of his ESG products and a wide variety of his ESG products, which causes a lot of confusion for retail customers.”

A recent report by Morningstar found that asset managers also find ESG rules difficult to interpret. Market researchers have found that the investment management industry changed his SFDR designation of more than 700 of his funds last quarter as the EU continues to clarify its rules.

The EU’s ESG investment rulebook, which came into force last March, requires companies to classify their investment products into one of three categories: Article 8 to “promote” ESG characteristics. Article 9 sets out measurable ESG “goals”.

The articles selected set the standard for the types of disclosures fund managers are required to make. We do not guarantee investment clients that the Fund will be filled with a certain level of sustainable assets. For example, a review by Morningstar found that 23% of Article 8 funds do not qualify as ‘ESG’.

The rapid rise of ESG investing has led to regulatory scrutiny in other jurisdictions. In the US, the Securities and Exchange Commission is currently working on new rules to deal with exaggerated claims by investment funds, and UK regulators earlier this month warned hedge funds that ESG was a “priority area”. He said he intends to review marketing. Materials distributed by the alternative investment management industry.

Investment firms that misclassify funds are at increased risk of regulatory action. His Sonali Siriwardena, partner at law firm Simmons & Simmons and his global head of ESG, said:

Against that backdrop, “an attempt to simplify and provide transparency to investors, and to provide a better understanding of what constitutes a product’s ESG label” is welcome, says Vanguard’s Chan. said Mr.

She also said that changes were “emerging” and that “some positive developments are taking place in the European situation that will help address this concern from retail customers.”

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