ETF issuers have their work cut out if they are to meet ‘level two’ requirements of the Sustainable Finance Disclosure Regulation (SFDR) amid a limited supply of ESG data.
Last December, the European Commission delayed the implementation of the second phase of SFDR for the second time until January 2023, giving firms an extra six months to ensure they are aligned with the wide-scoping regime.
Of particular focus for ETF issuers – and asset managers more broadly – is the Principal Adverse Impacts (PAI) statement which requires firms to provide “extensive” disclosures on various ESG metrics such as greenhouse gas emissions and the carbon footprint of a product.
The deadline for submitting the PAI statement, which requires reporting on 18 mandatory indicators, 22 additional climate metrics and 24 social factors, is 30 June 2023.
However, the PAI’s wide-ranging mandatory indicators could be a major stumbling block for issuers that have labelled their ETFs either under Article 8 or 9 as many of the data points have not yet been captured, while ESG vendors often charge high fees for the data.
How an ETF is classified under SFDR has become a key tool for investors when selecting ESG strategies and could determine which strategies see greater flow as the world shifts to a net-zero economy.
According to a survey conducted by Brown Brothers Harriman, some 28% of European respondents said they rely on SFDR when evaluating ESG ETFs, more than any other tool.
If an asset manager has classified a strategy as Article 8 but does not meet the requirements under ‘level two’ of SFDR, it could be downgraded to Article 6, the non-sustainable label.
Research from Cerulli Associates found sourcing ESG data, as well as the costs involved, could be the most significant challenge to implementing SFDR.
Some 82% of asset managers highlighted the limited availability of ESG data as a “significant” challenge while 18% said it was “somewhat” a challenge.
Meanwhile, 59% of respondents said converting funds to Article 8 or 9 is a “significant challenge due to the time and resources needed to devote to the initiative”.
As André Schnurrenberger, managing director, Europe, at Cerulli Associates, said: “The ESG data needed to comply with the SFDR regime is limited.
“Over the next 12 to 24 months, improving the reporting and measurement of material ESG risks will be a high priority for around 65% of the managers across Europe.”
On 31 March, the International Sustainability Standards Board (ISSB) – which was created by the IFRS at COP26 – proposed new global ESG disclosure standards, an area that is one of IOSCO’s key focuses at the moment as well.
This could be the step ETF issuers need to ensure they have the data required for SFDR but is it too little too late?