LONDON: At the London-based law offices of Simmons & Simmons, the phones are ringing off the hook.
Lucian Firth, an attorney who represents hedge funds and other asset managers on industry regulation, said his work life had been transformed by a new set of rules that prevent investment professionals from exaggerating the environmental and social credentials of whatever they’re selling.
“We’ve talked to loads of United States managers,” Firth said “It’s a very large part of the working day.”
The European Union (EU) introduced the Sustainable Finance Disclosure Regulation (SFDR) in March, and since then, clients from New York to Hong Kong have been reaching out to Firth and his colleagues at Simmons & Simmons for information about how the new rulebook will impact their business.
That’s because they’re slowly realising that an anti-greenwashing initiative created in Brussels is about to rein in a global environmental, social and governance (ESG) market now estimated at US$35 trillion (RM145 trillion). SFDR has “long tentacles,” Firth said.
S&P Global estimates that non-EU investment firms valued at more than US$3 trillion (RM12.46 trillion) must adhere to SFDR, though not all will yet be fully aware. What’s more, that figure is likely to be “far higher,” given it only represents listed managers, S&P said.
Firth said he told clients outside Europe that if any of their marketing material targets the region, they’ve “got to do SFDR disclosures for that fund.” But he also said he was increasingly seeing firms outside Europe starting to comply, even if they were not within the scope of SFDR.
Europe’s asset managers have had a ringside seat as SFDR extends its grip.
Nina Hodzic, head of the sustainable investment office at Allianz Global Investors, was part of a group of fund managers and nonprofits that helped the European Commission thrash out its sustainable finance rules.
She said Allianz GI, which oversees €633bil (US$740bil or RM3.07 trillion) in client funds across the world, has seen movements in Asia and the US that showed regulators and investors they were “really looking at what’s happening in the EU”.
“The snowball effect could happen quicker than some might think,” Hodzic said. “We haven’t seen something like SFDR happen before, where it is introduced and picked up so quickly.”
It forces asset managers to substantiate ESG claims by holding them up against taxonomies still being written by European authorities. It integrates with other pieces of financial legislation to make sure managers ask clients whether they want to invest sustainably. Managers are then legally obligated to live up to those expectations.
It obliges asset managers anywhere in the world to comply with European rules for all the services and information they make available to clients in the region. In Europe, SFDR is already forcing fund managers to stop marketing dubious products as sustainable because the new rulebook no longer lets them get away with the kind of puffery that used to be widespread.
Meaningless labels such as “ESG integrated” – once a staple term in the industry – have started to vanish from asset managers’ accounts.
“I am hoping the word ESG ‘integration’ is going to disappear because ESG ‘integration’ means nothing,” said Hortense Bioy, director of sustainability research at Morningstar Inc. “It means everything and nothing. You have to be specific and explicit.”
As vague labels get weeded out, the ESG market appears to be undergoing a correction. In Europe, the fund industry stripped the ESG tag off US$2 trillion (RM8.31 trillion) worth of financial products in the two years through 2020, just in anticipation of stricter rules. It’s part of the reason that ESG assets are now – for the first time ever – smaller in Europe than in the US. The question, though, is whether a similar adjustment is headed for the US.
What’s more, European asset managers know the correction they’ve just been through probably has further to go. They’ve spent the past months pouring over statements to clients to make sure they won’t be publicly shamed by regulators who are clearly losing patience with bogus ESG claims, according to people familiar with the matter.
In some cases, internal swat teams have been set up to trawl through marketing materials and purge them of extravagant declarations around sustainability, lest investors complain they’ve been misled, they said.
Greenwashing – a term that wasn’t on the finance industry’s radar a decade ago – has suddenly become a major legal headache in the asset management industry. And firms that might have entertained the notion that regulators weren’t really tracking ESG claims are now sitting up and paying attention.
A month and a half after Germany was struck by some of the deadliest floods in living memory, the investment unit of its biggest bank made headlines for alleged greenwashing.
DWS Group, which is majority owned by Deutsche Bank AG, is being investigated by the US Securities and Exchange Commission and Germany’s regulator, BaFin, for allegedly having overstated the scope of its ESG investing. DWS’s shares sank 14% when the news broke and haven’t really recovered since.
Firth at Simmons & Simmons said he’s struck by the pace at which the ESG landscape has changed. “Four years ago, I was telling clients who invest in equities about the importance of ESG,” he recalled. “And they basically showed me the door.”
Now, the industry is intensely aware that ESG is huge and that anti-greenwashing regulations represent a whole new world of potential legal risks, he said.
By some accounts, the shift in culture was long overdue. Florian Schneider, head of cross-border products at Amundi SA, said that not that long ago, fund managers “used to be able to tell you whatever story they wanted.” But SFDR has finally “set parameters for how those stories are told.”
The Amundi manager said he was now fielding calls from investment firms in Asia, the US and Latin America that were keen to build SFDR into their work flows to “brand” their ESG products. ― Bloomberg