Despite the EU’s ESG regulatory framework contributing to a rise in sustainable investing, greater clarity is needed to tackle concerns about greenwashing and the lack of reliable data, according to research from CFA Institute.
In a survey of its membership, CFA Institute pointed to a broad range of challenges facing EU investors around ESG disclosures, the reliability of data and the complexity of ESG ratings. While members wanted EU regulators to continue to drive the international agenda on sustainability, they also wanted a focus on more tailored legislation around ESG disclosure requirements to ensure alignment with investor needs.
The EU’s Sustainable Finance Disclosure Regulation (SFDR) – which forms a crucial part of their ESG regulatory framework – is currently under consultation, with the European Commission aiming to update and align the framework to meet the demands of the current sustainable investment market.
See also: ESA suggestions for SFDR improvements ‘could bring it closer to the UK’s SDR’
“One of the reasons we conducted this survey was to understand how our EU members view the current EU regulatory regime, which is meant to support and encourage sustainable investing,” said Josina Kamerling, head of regulatory outreach, EMEA, at CFA Institute.
“We observed mixed views on the topic: while a broad consensus exists that the EU regime is advancing the international agenda on sustainable finance, a similar proportion feel that EU efforts are confusing, and the lack of reliable ESG data does not make it worth integrating ESG considerations in investment decisions. This is a worrying finding, and regulators ought to pay attention to feedback from investment practitioners.”
Key challenges and recommendations
Almost two-thirds of respondents to the survey (65%) said the lack of reliable ESG data was among the biggest challenges for asset managers in implementing SFRD. 45% said higher costs to collect ESG data and the lack of skilled personnel with experience in ESG and data collection was an additional concern.
Retail investors also find themselves confused by the volume and intricacies of sustainability information, making it difficult for them to use such information to make sound investment decisions. One in three survey respondents said the disclosure requirements under Articles 8 and 9 of the SFDR are too complex and make it difficult for retail investors to fully understand the degree of sustainability impact for funds in which they are considering investing.
Meanwhile, 32% of respondents expressed difficulty in comparing ESG products because required disclosures are not standardised or comparable across jurisdictions for retail investors. A lack of clear definitions in SFDR, they said, resulted in asset managers and companies interpreting existing rules and standards in various ways, leading to a diverse implementation of the EU legislation.
To address these concerns, CFA Institute published a number of recommendations intended to provide clarity and consistency in the EU’s ESG regulatory framework.
The EU should “continue to drive the international agenda on sustainability”, according to CFA Institute, with a particular focus on developing more tailored step-by-step legislation concerning ESG disclosure requirements and taxonomies.
They also urged the EU to provide clear and consistent ESG terminology throughout the entire legislative framework on sustainable finance; consider the significant challenge posed by unreliable ESG data and the associated costs for data collection and training of staff; better clarify the fund categorisation system outlined in SFDR; and address the complexity of ESG ratings and the divergent methodologies used by providers.
