The introduction of the EU Sustainable Finance Disclosure Regulation almost two years ago marked an important step in the encouragement of capital flows towards efforts that promote and enable a more sustainable economy.
As they have spent the past few months preparing for the roll out of SFDR Level 2 at the start of this year, will asset managers, advisers and investors alike be greeted by issues surrounding data alignment, reporting and distribution into multiple jurisdictions?
In this piece, we’ll take a closer look at some of the potential pitfalls surrounding the practicalities of this wide-reaching enhanced disclosure regulation.
The data challenge
At the centre of SFDR is the process of collating and reporting data, but how can businesses be certain on the accuracy and precision of the ESG data they are submitting?
Under SFDR Level 2, firms are obliged to disclose in much greater detail how and why they have made their Level 1 declarations, which puts significant responsibility on data management teams to effectively collect and disclose the data required.
For asset managers, often ESG data has had to be collected from multiple sources and therefore may not always be consistent.
The inconsistency of ESG data is creating challenges for firms when reporting on their SFDR Level 2 requirements and aligning with the EU Taxonomy Regulation.
While a lot of the focus has historically been on the collecting of data, firms’ priorities now need to shift towards the reporting side.We are already seeing examples of funds having to reclassify themselves from Article 9 funds to Article 8 funds, as they are unable to obtain and align the necessary data sets from portfolio companies to demonstrate that they adhere to the more stringent Article 9 funds, which require at least 80 per cent of investments have sustainability as their objective.
The asset management community needs to be prioritising a robust data strategy in order to be taking the provision of sustainability-related information with respect to financial products seriously.
It comes as no surprise that in a Broadridge survey 20 per cent of respondents said that the methodology and alignment of ESG data was front of mind this year to meet the requirements of SFDR.
Pulling it all together
Many asset managers see the production and dissemination of detailed reports as a key challenge in their journey to be SFDR compliant.
An organised and strategic approach to the gathering, alignment and collation of data is a prerequisite for a smooth reporting process. However, while a lot of the focus has historically been on the collecting of data, firms’ priorities now need to shift towards the reporting side and getting the disclosures to investors and platforms.
Potential difficulty that firms may find themselves in is the translation of their disclosures to ensure that their clients have access to a wide range of languages when digesting SFDR disclosures.
Along with the importance of collating and reporting data when adhering to SFDR, translation should not be overlooked from the service process chain.
There is no doubt that we will continue to see the debating and evolving of SFDR reporting requirements.Secondly, when reviewing all of the moving parts of SFDR, the asset management community needs to be considering the cost and time burden on in-house resources.
SFDR is one of the largest pieces of ESG-related legislation rolled out anywhere in the world, and compliance requirements are extremely timely and costly processes.
Firms trying to go at it alone may not be opting for the most time and cost-effective method.
Furthermore, SFDR reporting does not provide a competitive advantage for the asset management community, and as with other regulatory reporting it should embrace the outsourcing of SFDR regulatory reporting and data management functions to third-party specialist service providers.
Through outsourcing, asset managers can future-proof their SFDR reporting processes and be prepared for whatever course this regulation takes.
Looking ahead
There is no doubt that we will continue to see the debating and evolving of SFDR reporting requirements and the labelling of ESG categories throughout this year.
It is critical for the asset management industry as a whole to not only meet the requirements of the SFDR regulation, but also consider how effectively what is reported actually represents reality.
Although the road ahead may be a little bumpy, the asset management community needs to stand strong on its promises of quality and integrity when it comes to meeting SFDR requirements and ensuring ESG funds deliver on their sustainability goals.
Afzal Amijee is commercial director of Broadridge Fund Communication Solutions
