Asset managers in Europe still have much to do to comply with new regulations that require them to incorporate sustainability risks across their investment processes, product governance, and internal systems.
“It’s still unclear how soon managers will be in a position to comply with the EU's Sustainable Finance Disclosure Regulation (SFDR), which took effect last month,” says Fabrizio Zumbo, associate director of European asset and wealth management research at Cerulli Associates.
Under the SFDR, European funds need to be classified by their managers into one of three categories, with the required disclosures tailored to each. Varying degrees of disclosure on environmental, social, and governance elements have to be provided to investors in all funds.
Asset managers face a number of challenges when categorizing products under the three categories of the regulation. For example, it is not clear what constitutes “promoting” environmental, social, or sustainable objectives, Zumbo says. Managers should continually reassess the assignment of their products under the SFDR in the short to medium term.
Assigning Article 8 status is more straightforward. This refers to financial products where the primary objective is not sustainable investment but promotion of environmental or social characteristics, among other things. But deciding which products might instead be assigned to Article 9, or those with sustainable investment as the core objective, is less obvious, according to the latest edition of The Cerulli Edge.
The absence of any formal market standards or definitive regulatory framework is also making it difficult to map existing policies and processes onto those requirements. This has led asset managers to apply their own interpretations and processes.
The resultant bespoke structures may not match with the more prescriptive elements of SFDR, which adds to the challenge managers face in ensuring that they have access to robust datasets that match the SFDR requirements. They need data to inform their investment processes, to provide outputs for disclosures, and to underpin their operational infrastructure.
Another complication is that many financial products that fall within the scope of SFDR will have investment in regions outside of Europe, where it might be difficult to obtain quality data, Cerulli says. In addition, managers of funds that hold shares in other funds will need to have full knowledge of those fund portfolios to satisfy the requirements around consideration of principal adverse impacts.