Sustainability-oriented investors should expect to find some unexpected holdings in their portfolio when they choose products with a swap-based (synthetic) index replication approach. While index products with a full replication approach hold normally only the constituents of their respective index, the portfolio of a synthetic product is built with a swap that replicates the risk/return profile of the respective index and the so-called collateral. The securities held as collateral are often chosen based on their liquidity and transaction costs, as this helps to minimize the costs of managing the product. If the securities for the collateral are not chosen with

A few days ago, I was asked if the Sustainable Finance Disclosure Regulation (SFDR) and the respective definitions and classifications within the EU Taxonomy are the gold standard for sustainable investing which should be used as a blue print for global regulations. My answer to this question was no. Despite the fact that I think that SFDR and the respective reporting duties under the Markets in Financial Instruments Directive II (MiFID 2) are a good starting point, I think there are still too many blind spots within the regulations which leave too much room for interpretation and may therefore lead

After the introduction of the Sustainable Finance Disclosure Regulation (SFDR) a number of investors started to use the respective classifications as selection tools for mutual funds and ETFs, since they wanted to comply with internal ESG guidelines or to ensure that they offer the right funds to their customers. Even as this approach seems to be logical and right, it may not lead to the right results. As the demand for mutual funds and ETFs classified by article 8 or 9 increased, fund promoters reacted and relabeled a number of funds, respectively, in some cases without changing the investment strategy

It was not surprising that Q1 2022 was in general a negative quarter for the European fund industry given the geopolitical situation in Europe, the still ongoing COVID-19 pandemic, and the sluggish market environment. Within this market environment and given the economic uncertainties, one would expect that European investors sold long-term funds and bought money market products. Therefore, it is somewhat surprising that European investors sold money market products, which are normally considered safe-haven investments, while long-term products enjoyed overall inflows.   Note: As this report covers also markets outside the EU, like the UK and Switzerland, a high number

On April 6, 2022, the European Commission adopted the disclosure rules on sustainable investments. These technical standards were long awaited by industry participants as they specify the exact content, methodology, and presentation for disclosing sustainability-related information to comply with the Sustainable Finance Disclosure Regulation (SFDR) (Regulation (EU) 2019/2088), which came in force on March 10, 2021. This means that asset managers and other market participants had to wait more than a year before they knew what to disclose in which format to comply with the SFDR. The clarification on measures and content may lead to the reclassification of some funds

Environmental, social and governance (ESG) was one of the major drivers for the growth of the European fund industry over the course of the year 2021. The new EU regulations based on the Action Plan on Financing Sustainable Growth by the EU Commission drove these developments. The plan of market regulators to have all regulations, a taxonomy, and the respective technical standards in place by the end of the year 2021 failed, as the technical standards need to fulfill the reporting duties for the implementation of the EU taxonomy were delayed twice over the course of the year. The lack

After postponing the implementation of Sustainable Finance Disclosure Regulation (SFDR) from January 1 to June 2022, the EU Commission has delayed the issuance of the so-called level 2 regulatory technical standards (the guidelines which explain in detail which data needs to be disclosed in which format) by another six months to January 2023. According to John Berrigan, the deputy director-general for financial stability, financial services and capital markets union at the EU Commission, the delay is due to the length and technical detail of the regulatory standards. The first delay of the start of the detailed SFDR reporting duties was

By observing the current trends in the European fund industry, I have the feeling that sustainable investment strategies will become increasingly focused on environmental aspects—the E in ESG—instead of taking a holistic view. This trend is obviously driven by the decision of the EU Commission to focus its action plan on financing sustainable growth on environmental aspects, as the EU wants to be the leading economic area with regard to the reduction of greenhouse gas emissions in the fight against climate change. This is not only true when it comes to fund launches—even established funds are getting repurposed to meet

As an increasing number of fund managers start to integrate ESG criteria into their portfolio management process, the potential to disappoint investors and fail to live up to their expectations increases. Investors who are buying a fund with a sustainable or ESG-related investment objective may think that these funds have a strong focus on all relevant criteria. But obviously this is not always the case, as all fund managers have different views on how to integrate non-financial criteria into their selection process. Some only focus on single aspects such as carbon emissions, while others focus more on social criteria or