Key SFDR Strategic and Operational Considerations for Managers
The 10th March deadline is past. Disclosures have been made. Next step, implementing and monitoring. Are you ready?
For many 10th March 2021 is seen as D-day. The date which represented the “line in the sand” for compliance with the first deadline within the Sustainable Financial Disclosure Regulation “SFDR”.
Leading up to this date, asset managers, UCITS management companies and alternative investment fund managers (AIFMs) have had to make decisions regarding their approach to sustainability risks, principal adverse impact, their remuneration policies etc. and whether they are categorising their financial products as sustainable (article 9), other ESG (article 8) or other – being those which are neither ESG nor sustainable (article 6). Yet for those who thought decisions would end on the 10th March, this is only the beginning.
Post 10th March this will, for many, be where the real work begins. It is essential that the strategic direction of the asset manager, UCITS management company, AIFM, or financial product fulfils the promises and commitments which have been made in updated prospectuses and websites. For those selling financial products, it is also crucial that they understand the new commitments and promises which have been made, ensuring that these are included in the investment advice which they are giving their clients.
Investor pressure is one of the key drivers of the ESG revolution as investors demand that their capital is invested in a sustainable manner. This pressure was clearly identifiable in a recent PwC European report which noted that 77% of European institutional investors plan to stop purchasing non-ESG European products by the end of 2022. This pressure means that asset managers need to be mindful of the necessity of being both credible and consistent in their ESG approach. It is no longer enough to merely offer ESG financial products without addressing ESG and sustainability risks within their own businesses. Furthermore, investors will be quick to hold those to account where they feel that these promises and commitments are not being met.
For those asset managers who want to be seen as truly credible sustainable asset managers, the commitment to ESG must be a core part of their overall financial product offering, their organisational vision, strategy and risk framework. They must be transparent about their objectives, how these are to be achieved, and what additional action needs to be taken in the event of any shortfall. With the strong commitment towards greening the economy, it is widely accepted that what is a voluntary disclosure today, will quickly become the mandatory disclosure of tomorrow.
In its recent Securities Markets Risk Outlook Report – Conduct Risks in an Uncertain World, Securities Markets Risk Outlook Report 2021, the Central Bank of Ireland outlined two very clear expectations of both financial service providers and issuers of financial instruments. Namely that they:
- Review their sustainable product offerings to ensure they meet the required standards and that the features and risks of those products are properly explained. This includes highlighting any risks or caveats to their sustainable features.
- Consider their preparedness for the transition to greener securities markets, the conduct risks arising within their firm from this transition and how they will identify, mitigate and manage those conduct risks.
Therefore, for those who thought it was “pens down” once they reached 10th March, unfortunately this is not the case. Most likely, this is the first step on a continually evolving journey as the pressure to be sustainable increases alongside investor and regulator expectations around the quality of disclosures. It is clear that ESG and sustainability have to become a part of everyday life in the operations of an asset manager, UCITS management company and AIFM.
Key questions which asset managers should be asking themselves as they look to plan their strategic and operational direction post 10th March:
- As an organisation, is the strategy around meeting the regulatory requirements or using sustainability to become part of the identity of the organisation enough to merely meet the spirit of the regulatory changes which are happening or do you want to be a front runner?
- What changes are you asking of your investee companies and how are these aligned with your own organisational strategy?
- Do you need to revisit your risk management framework to ensure that it is fit for purpose to manage ESG risks?
- What are your new data requirements as a result of the decisions you made in the run up to 10th March? How are you going to fulfil these and what changes will be needed within your own internal data governance framework?
- What will be your new reporting obligations as a result of the decisions made, and how do you ensure that the information you provide to investors and regulators alike is reliable, credible and transparent? Who within the organisation (management and the Board) is responsible for overseeing the decisions made and the overall disclosures?
- What degree of upskilling is needed within your organisation and is this only undertaken within the investment and risk management functions? Are your people sufficiently qualified to speak about ESG when selling their products?
- Have you considered the upskilling needs of your investors and investee companies as a result of changes in your own strategic direction?
Lesley Bell and Deirdre Timmons, PwC Ireland