Sustainable investing will become more focused and much clearer across the EU under a new regulatory framework for asset managers and their funds. The Sustainable Finance Action Plan (SFAP) aims to promote sustainable investment across the 27-nation bloc and meet the climate goals of the Paris Agreement and the European Green Deal. It will be backed by a broad set of regulations, either set in new rules such as the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation, or by adding sustainability to existing rules.
The SFAP has three main objectives. The first is to reorient capital flows towards sustainable investment and away from sectors contributing to global warming such as fossil fuels. Second, it aims to manage financial risks stemming from climate change, resource depletion, and environmental degradation. Finally, it seeks to foster transparency and long-termism in financial and economic activity.
The SFDR aims to make the sustainability profile of funds more comparable and better understood by end-investors, using pre-defined metrics for the environmental, social and governance (ESG) characteristics used in the investment process. As its name suggests, much more emphasis will be placed on disclosure, including new rules that must identify any harmful impact made by the investee companies.
Robeco’s executive committee and senior management teams have been working with sustainability specialists to get ready for the biggest changes seen in investing in Europe for many years.
“We view the forthcoming regulations as an opportunity for the financial industry to play an active role in creating a more sustainable economy, something that we as Robeco have been working to achieve for over 20 years,” says Carola van Lamoen, Head of Sustainable Investing at Robeco.
“We support the aims and objectives contained within the plan, and will play an active role in implementing and advancing them, and maintain our leading position in the sustainable investing landscape.”
Robeco has committed a dedicated project team of over 40 people to embed all aspects of the SFAP, which will come into effect in phases, with the first important deadline coming up in March 2021.
The SFAP was first laid out by the European Commission in March 2018 in response to the landmark signing of the Paris Agreement in December 2015, and to the United Nations 2030 Agenda for Sustainable Development earlier in 2015, which created the Sustainable Development Goals. It is also aligned with the European Green Deal, which aims to see the EU carbon neutral by 2050.
The plan aims to bring in harmonized rules on sustainability-related disclosures and policies, preventing diverging measures across the European single market and thereby creating a level playing field. As such, it seeks to establish a clear and detailed EU taxonomy rather than a mix of national measures enforced locally.
In addition to those rules targeted specifically at asset managers, the plan aims to develop sustainability benchmarks against which investment strategies can be judged alongside the mainstream indices. It wants to better integrate sustainability into ratings and market research, and work towards clarifying asset managers’ and institutional investors’ duties regarding sustainability.
The scope of the regulation is very broad and applies to asset managers, pension funds, EU banks and insurers, among others. This means that many of Robeco’s clients are also subject to the new regulatory requirements. Apart from being ready to make its own disclosures in prospectuses, annual reports and on the website, Robeco will support its clients in providing the information they need to be able to make their required disclosures under the SFDR.
Classification of funds
A very visible and impactful element in the new regulation is the classification of funds and mandates in three categories, as described in Articles 6, 8 and 9 of the SFDR.
Article 6 funds are those which do not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG funds such as tobacco companies or thermal coal producers. While these will be allowed to continue to be sold in the EU provided they are clearly labelled as non-sustainable, they may face considerable marketing difficulties when matched against more sustainable funds.
Article 8 (or ‘E&S promoting’) applies “… where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.”
Article 9 (or ‘products targeting sustainable investments’) covers products targeting bespoke sustainable investments and applies “… where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark.”
Subject to final approval from the regulatory authorities, Robeco expects that most of its funds will be classified as Article 8, with the Impact Investing range (branded as RobecoSAM) classified as Article 9, and a handful of Article 6.
Identifying adverse impacts
Adverse impact statements will be introduced from June 2021. These require an asset manager to describe its due diligence policy on how it will take the principal adverse impacts which investee companies have on sustainability factors into account when making investment decisions.
This will be policed using a system of 50 adverse impact indicators, of which 32 will be mandatory to report, and 18 will be voluntary. While detailed requirements relating to adverse impact are only expected to become final in January 2021, Robeco has dedicated efforts to make sure it is prepared, for example by creating adverse impact prototype tooling to assess the impact of the regulation.
Another impactful element of the SFAP is the proposed EU taxonomy, which aims to create a harmonized understanding of what actually consitutes ‘green activities’. The EU has defined minimum criteria that economic activities should comply with in order to be considered environmentally sustainable.
In short, such activities should contribute substantially to one or more of the following six environmental objectives: climate change mitigation and adaption, protecting marine and water resources, transitioning to a circular economy, preventing pollution, and protecting or restoring biodiversity and ecosystems.
Only those activities contributing to the first two environmental objectives – climate change mitigation and adaptation – have so far been defined. The first disclosures on these objectives will need to be made by January 2022. The activities deemed to contribute to the remaining four objectives are expected to become clear in 2021, with disclosures to be made as of 2023.
To meet the taxonomy, asset managers will have to disclose the percentage of their funds’ assets under management that sit within taxonomy-aligned activities.
“We have been reporting on the ESG profile and impact of our sustainable funds as part of our regular client reporting for many years now,” says Van Lamoen. “We aim to be just as transparent going forward when considering the taxonomy alignment of our funds and segregated mandates.”
Carola van Lamoen, Head SI Center of Expertise Robeco