Regulatory divergence across Europe on environmental, social and governance (ESG) investing is a direct risk to investors as asset managers struggle to get to grips with a rapidly changing landscape and moving goalposts.
The importance of a coherent regulation was highlighted earlier this year after former DWS sustainability head Desiree Fixler whistle blew on the asset manager, alleging it had misrepresented its ESG capabilities.
Across the globe, financial regulators are rushing to catch up with the boom in ESG investing which saw assets under management claiming to adhere to climate or ESG considerations swell to $1.7trn at the end of 2020.
In October, the UK government became the latest to outline new requirements for asset managers to show how they incorporate sustainability into their investment strategy.
The Sustainability Disclosure Requirements (SDR) – not to be confused with the European Commission’s Sustainable Finance Disclosure Regulation (SFDR) – come as the German and French financial regulators, BaFin and AMF, also impose their conditions on ESG investors.
All these regulations are supposed to be streamlining the process while reducing the risk of greenwashing but are instead adding to regulatory overgrowth cross-border firms must cut through.
“The fast-moving pace of regulatory change related to climate change and, latterly, wider ESG issues, creates a significant challenge for financial services firms operating across multiple borders,” he warned.
“For example, jurisdictional differences in taxonomies make group-wide definitions and product-level disclosures problematic. Cross-border firms will also need to comply with different data and reporting requirements and supervisory approaches.”
Pilgrim added firms must understand and take a holistic approach to the totality of the sustainable finance-related regulatory requirements, in particular external disclosures, that apply across their locations but herein lies the risk.
BNP Paribas Asset Management CEO said last month fragmentation across Europe is causing “confusion risk” for the end investor and “bemusement” in the market due to the requirement for a fund to promote ESG characteristics.
The second rollout of SFDR next year may go some way to alleviating these problems but any regulation on a national level must be more aligned with these requirements.
As global leaders and asset managers convene in Glasgow for the United Nations COP26 climate summit over the next two weeks, it should serve as a reminder that not only does diversion grow the risk of greenwashing, but could also prove counterproductive in the fight against climate change.