Jess Foulds, ESG Strategy Director, Aviva Investors, and Christian Schuetz, Director, Investments / ESG, Golding Capital Partners.

The Sustainable Finance Disclosure Regulation (SFDR) has fundamentally changed the way fund operators in Europe look at sustainability within the market – it has become the benchmark framework around the world that many others have been based on.

But how have those in Europe adapted to it and what are the challenges and opportunities they’re seeing after its implementation has had time to embed.

Earlier this year, Clear Path Analysis held a roundtable in Frankfurt in conjunction with Clarity AI and 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. The discussion is now compiled in a new report called, “Effective ESG And Sustainability Investment Policies”. 

In it, panellists were asked how regulatory requirements impacted businesses from an operational standpoint. They were asked to focus especially on SFDR and for how the businesses that they work with were keeping track of the fund’s compliance and solving it?

“The three key things for me are metrics and having the integrity of the metrics is important and also the different skills that are needed to bring together what’s being done.,” said Jess Foulds, London-based ESG Strategy Director, at Aviva Investors, who highlighted the need for a cohesive plan and also to look at the process holistically – make sure all aspects of regulatory compliance for sustainable funds were being worked together rather than in disparate ways.

Foulds's first point was in terms of operational changes because of the different levels at which [the sustainability compliance angle] hits the firm. “At the beginning people didn’t realise the operational changes needed to comply were about the processes underlying your investment processes across different asset classes,” she said.

“Then you’re bringing in the product teams,” she said, specifying where firms needed to look to achieve harmonisation internally. “This is about specific Article 8 and 9, and no one can hide in this and that’s a brilliant thing. SFDR mobilised everyone. That’s the first piece — how all-encompassing it was in terms of getting the whole business moving.

"With SDR now in the UK, the operational focus is, “how is this going to help us deliver for investors? How does it help explain what we’re doing to them?””

Her next aspect on how to achieve compliance easily was focused on how the industry talked about regulation as a driver and the fact that “we are here to deliver for investors and our clients, and the regulation is an important part of that and interpreting it and understanding it” was key. This was especially important within the context of how the industry should go about delivering this sustainable regulation change. “[We should] never [lose] sight of what different investors need and what their particular objectives have been a real learning curve through SFDR,” she said.

This, she said, is because as fund managers there can be too much focus on this angle so there needed to be a step back to look at the full picture. “We need to comply with these elements, whereas how this helps us deliver for investors as well is important,” she said. “And with Sustainability Disclosure Requirements (SDR) now in the UK, the operational focus is, “how is this going to help us deliver for investors? How does it help explain what we’re doing to them?””

Other panellists took it a step back and said the regulations were clarifying matters for them at a macro level rather than occasionally causing tunnel vision.

Holistic endeavours

“We’re a private markets platform [and] we are invested in fund-of-fund infrastructure, private equity, and private credit,” said Christian Schuetz, Director, Investments / ESG, Golding Capital Partners. “When thinking about how regulatory requirements impact operations, it is important to reflect that the [life of a portfolio] usually starts way before anyone knows which company will end up in a portfolio. We commit capital to target funds. Thereby when we think about impacts on operations and integration of regulation it starts with the questions on those funds’ regulatory compliance that we’ve committed our investors’ capital into. From a fund-of-funds perspective, managing the compliance of our strategies comes on top.”

“It’s not a one-to-one data problem per se,” he said. “It’s a strategic and philosophical problem. How do those pieces interact?”

Schuetz said that regulation enables fund operators to be in a position whereby the sustainability ambitions of target funds should become clearer, “but it’s often not”.

“It’s not a one-to-one data problem per se,” he said. “It’s a strategic and philosophical problem. How do those pieces interact?”

This, he said, has been a repeat of what happened in the credit markets several years ago when green bonds were introduced. “Everyone hopped on the labels, but often didn’t look much into the details,” he said.

European divergence and convergence

Schuetz said his firm caters to a predominantly German-based institution client-base, which shows a genuine interest in ESG and sustainability and by extension in the regulation and SFDR but sometimes cares little about the details.

“This can be seen through simplified selection processes for regulatory categories such as Article 8, which appears like a tick box exercise on occasion,” he said, and meant that it brought its own set of unique challenges. “Getting the educational clarity into the broader asset owner base, what all those different regulations even mean, is important to us.”

“We’ve done a lot with our investors to make them understand what’s possible and grow into this regulatory, data, compliance, reporting understanding as the investments mature."

“For example, an Article 8 fund is not a fund that you commit to, and you get your CO2 number from all the underlying portfolio companies,” he said. “Instead, you get clarity of what those funds want to invest in or aim at. Providing this clarity is a huge journey and regulation hasn’t done a great deal solving that first piece of the puzzle.”

He added that operationally there “is a lot more to handle because you need to manage both those strains”.

“We’ve done a lot with our investors to make them understand what’s possible and then to grow into this regulatory, data, compliance, reporting understanding as the investments mature,” he said.

As the industry continues to develop it’s likely the work on helping this understanding will only increase in importance.

You can read more of Foulds and Schuetz’s thoughts and the report in full, by clicking here. 

 

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