October 2022 / INVESTMENT INSIGHTS
Navigating the EU’s Sustainable Finance Revolution
What Europe’s new sustainability rules mean for investors
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.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.
October 2022 / INVESTMENT INSIGHTS
October 2022 / ASSET ALLOCATION VIEWPOINT