Demand will continue to grow in 2021 for financial products that meet environmental, social and governance (ESG) criteria. Regulators are keen to encourage this. Rules on green investing are currently being rolled out, and the next phase is being planned regarding action on other sustainable investment criteria.
According to PwC, ESG compliant assets are set to account for up to 57% of the total holdings of European investment funds by 2025. This figure won’t shock anyone in the Luxembourg financial sector, as whether it is in funds, life insurance or wealth management, clients over the last couple of years have been increasingly looking for products featuring sustainability goals.
European policymakers want to create greater transparency for investors by taking the EU regulatory framework to new levels. Yet this is even before the current wave of green investing rules have been implemented by the financial sector. The first deadline for the sustainable finance disclosure regulation (SFDR) is 10 March 2021, followed by the requirement to “comply or explain” the sustainable investment approach of investment products produced by large financial market participants by 30 June.
After this will come the need to align portfolios with the green investing “taxonomy” classification, and then disclose the results. This will need to be done partially from the start of 2022 and fully a year later. Many of these rules still need further clarification from the European Commission. As well, fund players will need to become acquainted with EU definitions.
For example, Stéphane Badey, a partner with Arendt & Medernach, spoke of how the rules talk of the concept of “doing no significant harm,” during the Luxflag Sustainable Investment Week on 14 October. “If you have a wind farm that negatively impacts indigenous people’s land rights then this would not meet the criteria,” he said. Then there are the nuances between different categories of funds. So called “article 6” vehicles make no particular attempt to be aligned with sustainability goals, while “article 8” and “article 9” funds have explicit, but different sustainability strategies.
Yet while regulators and financial sector players are working to understand and make practicable these new ways of thinking, the EU executive is preparing for the next push. “We are now exploring whether the taxonomy could and should be extended to social objectives,” Martin Spolc, head of the Sustainable Finance Unit at the commission’s DG FISMA told Luxembourg for Finance’s Sustainable Finance Forum on 28 October.
As for the governance dimension, the commission has already announced an initiative on this for next year, and this is currently in the public consultation phase. Spolc said: “We need to shift the mindset from greening finance to financing green; and ensuring that the financial sector can support businesses with their sustainability transition pathways.”