October 2022 / INVESTMENT INSIGHTS
Navigating the EU’s Sustainable Finance Revolution
What Europe’s new sustainability rules mean for investors
EXECUTIVE SUMMARY
Environmental, social and governance (ESG) investing has been one of the fastest-growing trends to hit financial markets, with demand from investors creating a myriad of investment products that range from integrating ESG factors into investment processes to seeking to achieve sustainable objectives. Somewhat amazingly this rapid growth in the ESG investment category has occurred with limited regulatory guidance over what constitutes an “ESG” or “sustainable” product. Even more amazingly, it has also occurred without the availability of a comprehensive ESG data set as most issuers do not disclose standardized environmental and social data.
The European Union (EU) has been the first regulatory block to comprehensively implement sustainable finance regulation. Underpinning the EU’s regulatory agenda is the establishment of an environmental and social data set known as the Principal Adverse Impact (PAI) indicators under the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation (Taxonomy).
These data sets are specific to the EU regulation and mark a different path than what we have seen from other regulators, who have coalesced around Taskforce on Climate-Related Financial Disclosures (TCFD) standards.
While the EU’s sustainable finance package captures the issuers that will disclose PAI indicators and EU Taxonomy metrics, delays to specific pieces of the package have resulted in asset managers and asset owners having to make PAI and Taxonomy disclosures before the underlying securities in their portfolio are required to disclose them. This has resulted in notable issues with data viability in the early stages of implementation of this framework.
In this paper, we take a closer look at the EU’s new regulations and how they will affect investors focusing on the long-term implications, as well as some practical short-term considerations all investors should understand.
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October 2022 / ASSET ALLOCATION VIEWPOINT
