By Jean-Pierre Gomez, head of Regulatory & Public Affairs Luxembourg, Société Générale Securities Services Luxembourg

The European Commission is committed to encouraging all asset managers to increasingly consider sustainable and responsible investment in their investment choices and strategies. But it also intends to fight against so-called green marketing<1> or much more serious green washing<2>.

The now famous E, S and G criteria<3> are requested to target companies eligible for the list of 72 economic activities meeting the environmental objectives to save the planet as defined by Regulation (EU) 2020/852 of 18 June 2020 (hereinafter the Taxonomy Regulation).

That said, how can we find our way around everything that is published in detail on these regulations aimed at regulating sustainable finance, both for investors and the investment manager?

Since 10 March 2021, any European investment fund must specify its green classification – green, moderately green, or not green at all - in its prospectus. Regardless of its status, UCITS<4> or AIF<5> and regardless of its alternative policy: real estate, private equity/private placement and even hedge fund.

This is the first obligation of this Regulation (EU) 2019/2088 published on 9 December 2019 in the Official Journal (OJ) of the European Union (EU) on the publication of sustainability information in the financial services sector, hereinafter the SFDR (Sustainable Finance Disclosure Regulation).

From 1 July 2022, the regulatory technical standards known as level 2 measures of this SFDR regulation will apply: the RTS<6>. The ESAs<7> have just published a new final version of these RTS on 22 October 2021 compared to the version of 2 February 2021. This new, normally final version of SFDR's RTS has been concatenated in a report that also includes the RTS of the Taxonomy Regulation. The European Commission still has to validate them at the end of December 2021 (?) to take effect three months after their publication in the Official Journal of the EU. The Commission intends to incorporate all the SFDR RTS, those of February 2021 and the RTS of the Taxonomy of October 2021, in a single document.

These RTS are necessary to produce the SFDR Report to be appended to the annual report of the financial statements of the Undertaking for Collective Investment (UCI) or to the KIID<8>. This SFDR Report includes a number of sustainability indicators for the investments made, the PAI (Principal Adverse Impacts), along with analyses and data to be provided in the 4 templates provided in the RTS.

However, is everything clear or sufficient to compile and communicate to investors and our European authorities all this sustainability information in the future SFDR Reporting?

It's hard to answer or rather know. First, because based on the latest figures available, according to Morningstar Direct on 10 July 2021, green-classified UCIs (UCITS +AIF) remain a minority: 24.6% for a UCI industry of approximately €18,800 billion or €18.8 trillion in net assets of investment funds domiciled in Europe at end-December 2020 (according to EFAMA<9>), of which barely 2.8% would be classified as green (Article 9 of SFDR) and 21.8% moderately green (Article 8 of SFDR).

There are different methodologies for assessing E, S or G criteria but no official definition of these criteria. In the absence of a clear definition of an ESG bond, for example, issuers are multiplying the number of interpretations. If we add the absence of a universal definition of green investments and the absence of a definition of what is sustainable, to this lack of standardisation of ESG methodologies, to correctly produce what must be included in an ESG Report according to SFDR, this becomes very complicated.

Compliance with the SFDR regulation requires asset managers and UCI producers/sellers to respond clearly to the needs of investors, hence the importance of this need for a universal definition.

Furthermore, large traditional data providers will only be able to disclose what they have on these ESG criteria. If a company listed or not listed on the stock market does not publish anything on the S criterion, gender equality in a company for example, the data provider cannot invent this data for the company.

Another element of the green puzzle, aside from the SFDR and Taxonomy regulations, is the other non-financial data laws and regulations to be considered: The CSRD (formerly NFRD)<10> currently being revised for a final version expected in 2023, TCFD Reporting<11> by 2025 or the climate law, which may vary from country to country.

The management company of a UCI will no doubt want to "industrially" combine the production of all these non-financial reports by using synergies in terms of IT development to collect data and minimise the cost of administrative maintenance and contract management.

We quickly realise that players in the financial markets that are not specialised in green finance will wait to see more clarity before embarking on a green data automation process and, without being pejorative, will opt for a low-cost DIY solution.

Similarly, an investment portfolio manager first seeks performance for their private or institutional client, even though they are mindful of not investing in a company that employs children to name a specific case. Another reason to wait before embarking on a green and sustainable policy.

One final point to add, that of the national ESG labels currently existing. Are they representative to legitimise the fact that a UCI can be truly green? Why not create a reliable European standard label accepted by everyone for comparison? Would the rating model of international and especially American agencies to assess and rate the risks of a country or company be the way forward?

OK for regulated, fair and transparent green finance, but there is likely still to be a long way to go for investors who want to be able to buy legally green financial products on the market.

<1> Green marketing consists of all initiatives aimed at using the ecological positioning of a brand or product to increase sales or improve a company's image.

<2> Green washing is a marketing method consisting of communicating to the public using the ecological argument.

<3> E, S and G criteria: ESG (for Environmental, Social and Governance) criteria are used to assess the consideration of sustainable development and long-term issues in the strategy of economic players (companies, local authorities, etc.).

<4> UCITS: undertaking for collective investment in transferable securities.

<5> AIF: alternative investment fund.

<6> RTS: Regulatory Technical Standard.

<7> ESAs: European Supervisory Authorities - ESMA, EBA, EIOPA.

<8> KIID: Key Investor Information Document.

<9> EFAMA: European Fund and Asset Management Association.

<10> CSRD (formerly NFRD): Corporate Sustainability Reporting Directive (formerly Non-Financial Reporting Directive).

<11> TCFD: Task Force on Climate-related Financial Disclosures.