How have ESG frameworks increased complexity?

Johannes Böhm, Senior ESG Data Analyst, Union Investments and Thomas Roulland, Director, Head of Sustainability Standards & Analytics, Allianz Global Investors, discuss how you handle challenges around different ESG frameworks.

Fund Operator Editor POSTED ON 6/27/2024 8:00:00 AM

Johannes Böhm (L) and Thomas Roulland.

After the implementation of Sustainable Finance Disclosure Regulation (SFDR), regulatory requirements impacting businesses from an operational standpoint have changed and developed. As a result, businesses in Europe are constantly trying to be compliant. 

ESG frameworks have become a major driver for the industry in terms of operations and where they are based and or draw funds from. Lesser-known frameworks such as the FNG label, or the BPVI concepts, have also increased complexity for fund providers. 

A major question remains: how do teams handle these challenges? 

Earlier this year, Clear Path Analysis held a roundtable in Frankfurt in conjunction with Clarity AI with 16 investment groups – including Aviva Investors, Aegon Asset Management, Columbia Threadneedle, and Union Investments – to understand the major themes impacting ESG investment, operations, and reporting, which is now compiled in a new report called, “Effective ESG And Sustainability Investment Policies”. 

The panellists shared the current difficulties they are facing, the key challenges of the future, and how they are overcoming barriers to sustainable investing, which included balancing the different operational priorities of various frameworks now applicable to ESG investment across Europe. The overarching consensus was that compliance was necessary but the surfeit of different jurisdictions bringing their own recommendations and rules was creating a headache for even the most operationally well-resourced and pro-ESG investors. 

“There are tonnes of initiatives in the market to standardise this as well as the regulatory developments such as the naming guidelines from the European Securities and Markets Authority (ESMA) and so forth,” said Johannes Böhm, Senior ESG Data Analyst, Union Investments. “So, complexity is increasing, but then also from the customer side — I’m talking especially from the institutional side — complexity and demand is increasing for certain requirements these days.” 

Böhm said from the institutional side that there was almost no mandate that hasn’t got an ESG requirement to it now and that they all differ. “Complexity is increasing and sustainability and ESG are unclear terms,” he said. “We are up for the challenge, but it’s resource intensive. We are pouring a lot of resources into that, and, at the end of the day, we will look at what makes most sense for us because we have our dedicated sustainable investment approach, we have our clear beliefs in terms of what belongs in a sustainable mandate and what doesn’t belong in a sustainable mandate.” 

He added that there was an element of keeping up with the industry as well as working on your own core beliefs. “[We’ll] match that, and we cross check that and to some extent if there are certain, let’s say market initiatives or labels that we feel are not helpful, then we will stick with our own standards as long as they can comply with regulatory requirements,” he said. 

Thomas Roulland Director, Head of Sustainability Standards & Analytics at Allianz Global Investors, said he wanted to focus on the wider effects and viewpoint around the discussion. This was because “we’re not only looking at the FNG label or the BVI concept, but also to what is currently being done on the UK Sustainable Disclosure Requirements (SDR), [and the French financial market regulator, The Autorité des Marchés Financiers] AMF”. These points were all connected and must be treated to some extent as effects of the same issue. 

The Forum Nachhaltige Geldanlagen (FNG), the Sustainable Investment Forum (SIF) of the German speaking countries, founded in 2001, is the industry association promoting sustainable investment in Germany, Austria, Liechtenstein, and Switzerland. One of FNG’s objectives is to assure the quality of sustainable investments by constantly improving quality standards for sustainable investment products. The Bundesverband Investment und Asset Management (BVI) is the German fund association, which has developed a joint target market concept with the German Banking Industry and the Derivatives Association (BSW) for sustainable financial products. The concept provides a minimum standard for the German market. 

He said there is an increasing complexity in the market due to a lack of standardisation between those labels or market concepts. “It’s become a real challenge today to create a product that can be sold across all jurisdictions,” he said. “This means we need to have proper resources to track and monitor all those developments, whether sustainability regulatory or labels related.” 

He added the saleability of certain funds was important as “you need to have a selection of funds that will be targeted for a specific market”. “Indeed, it might be difficult for a client, or even for us, to explain that a fund can be sustainable in Germany but not in France, for instance, due to different requirements of Labels/Market concepts,” he said. 

Some in the industry have said this will require more levels of protection in “a gold-plating” model. 

His final point on this complexity and what it meant for investment firms was on the client advisory aspect. “Nowadays, you need to be a sustainability expert to manage those differences, criteria, and requirements. But, from a client perspective, you want simplicity,” he said.  “When it is too complex, clients are less likely to go into that direction. We need to provide a lot of explanation, a lot of advice, and guide them to understand what is happening and what could be the likely impact to their assets.” 

You can read more of Böhm and Roulland’s thoughts and the report in full, by clicking here


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