As a key trade body for the investment management industry, EFAMA – the European Fund and Asset Management Association – has more recently focused on topics such as the Central Securities Depositories Regulation (CSDR), consolidated tape and the Sustainable Finance Disclosure Regulation (SFDR).
The former two topics have been discussed in my previous two ETF Insider articles, and since writing, there have been subsequent updates from the European Securities and Markets Authority (ESMA) and the European Commission. Firstly, ESMA issued a no-action letter to deprioritise supervisory actions on buy-ins under CSDR come February and secondly, the European Commission’s recent Markets in Financial Instruments Regulation (MiFIR) review proposal promisingly featured a real-time consolidated tape.
Accompanying CSDR and a consolidated tape, in the spotlight of EFAMA’s ETF Task Force work is the equally-relevant SFDR, a critical piece of legislation and part of the EU’s Sustainable Finance Action Plan.
In today’s climate, it is more crucial than ever to leverage the increasing interest of retail savers looking to put their capital towards advancing sustainability goals. European domiciled index-tracking ETFs – the majority being UCITS – are valuable building blocks for investors to achieve this; simultaneously offering a broad choice, transparency and potential returns at a relatively low cost.
Yet the implementation challenges with SFDR, alongside other pieces of legislation, are making the satisfaction of growing investor demand for sustainable products very complicated. It also risks undermining the broader EU policy objectives of the Action Plan.
This is becoming clearer in a number of ways. Firstly, given the deep and mutually dependent business relationship between ETF issuers and index providers, there is a need for ETF issuers to draw increasing levels of comfort with the information underlying the constitution of the indices their products are intended to track, so as to meet their own product disclosure obligations for Article 8 or Article 9 under the SFDR, among others.
Yet, considering the important role of index providers, and the fact that they are subject to very different disclosure rules under the recently amended Benchmarks Regulation (BMR) requirements, their incentive to provide such information required to meet SFDR-specific product disclosure obligations is, at present, essentially commercial and attempted only on a “best-efforts” basis.
EFAMA’s ETF Task Force believes that the most practical solution, and one also promising to preserve the critical partnership between asset managers and index providers, is an amendment of the relevant BMR-specific disclosure requirements, i.e. those to be included in benchmark statements, to be more aligned with the SFDR-specific requirements.
These examples demonstrate that some of the Action Plan’s legislative initiatives now being implemented, or still awaiting their “Level 2” measures, although well-intended, could have far-reaching effects.
Secondly, there are also multiple difficulties posed by the EU Taxonomy Regulation, with a serious lack of reliable data available to measure the degree of taxonomy alignment for investments, and their corresponding mandated disclosures for investors.
Furthermore, multiple sustainable objectives mentioned in the regulation are yet to be fully defined by the EU, with additional considerations arising under the MiFID II delegated acts around sustainability-related suitability rules, preferences, as well as objectives, raising further challenges and confusion for investors and investment managers alike.
In the meantime, alongside the developments of SFDR, CSDR and a real-time consolidated tape, we continue to work closely alongside all stakeholders for a stronger, more streamlined, and resilient ETF industry in the year to come.
Keshava Shastry is head of capital markets at DWS, chair of ETF task force at EFAMA and chair of the ETF committee at the Investment Association
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.