January 4, 2021

Monday Morning Memo: The Current Lack of Regulation Leads to Confusion on EU Taxonomy Disclosures

by Detlef Glow.

Transparency is one of the best ways to build trust between a customer and a corporation. Since this is quite old guidance, one might be wondering why the financial industry in general, and the fund management industry in particular, are so reluctant to offer the most transparency possible to their investors. Managing money for a client is a very sensitive task that needs a large amount of trust. This becomes especially true for sustainable investment strategies such as ESG or impact investing, because these strategies are often based on the values and beliefs of the investor. In addition to this, I strongly believe that transparency at the product level builds a solid foundation for investors to make informed investment decisions. Therefore, I am claiming in my reports and articles, especially where sustainable investments are concerned, that transparency is the most important topic for the investment industry to address to build investor trust in products and strategies. It will also help to avoid any accusations of “greenwashing.”

With regard to this, I was quite surprised by an action being taken by ESMA. The European financial markets watchdog—which is also looking for transparency—plans to loosen reporting duties for asset managers regarding the disclosure of the proportion of investments which are aligned to the new EU sustainability taxonomy by widening the number of asset classes which don’t have to be included in this calculation. This means that the asset basis which is eligible for the assessment is shrinking and the portion of the EU taxonomy aligned assets of the overall portfolio of an asset manager may look bigger than it would when all assets would be taken into consideration.

Having said this, it is no surprise that the European Fund and Asset Management Association (EFAMA) is backing the proposal made by ESMA since it wants to have as few burdens as possible for its members. On the other hand, it is also no surprise that the European Social Investment Forum (EuroSIF) says that this approach is not in line with the objective of the rules and wants to extend the disclosure even to segregated accounts and mandates. This means all assets managed by an asset manager will be taken into account to achieve as much transparency as possible with regard to the general alignment of assets to the EU taxonomy. In this regard, it is noteworthy that ESMA is also thinking about requiring the rules for all assets, not only for regulated collective investment vehicles, but has made no decision about this yet.

From my point of view, ESMA should strive to include as many asset classes as possible within these calculations but should limit the eligibility to the assets managed within regulated mutual funds, such as UCITS products. Once we see first results, ESMA and/or the EU Commission can make an educated decision if the eligibility needs to be extended to segregated accounts and mandates or not. While I am personally backing the demand for as much transparency as possible when it comes to collective investments, I think that mandates and segregated accounts should not be included in this approach. This is because they are bespoke solutions for institutional clients and professional investors in which the investor often exactly defines how and where the money should be invested.

Nevertheless, one could not only blame the asset managers for the lack of willingness to provide transparency. Even as the rules should come into force in March 2021, the EU Commission has already delayed the imposition of the technical standards on the implementation of the measurements and requiring asset managers to produce “high-level and principle-based” disclosures up until the standards have been defined and published. These circumstances lead to a high level of confusion among asset managers since they don’t know which disclosures they have to provide on which assets.

Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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