The European Union’s (EU) impending regulations on sustainable finance will not replace current responsible investment frameworks but seek to move impact investing into the mainstream, according to Cerulli Associates.
As risk management, measurement, and reporting structures constructed by asset managers in Europe differ widely, the EU aims to achieve conformity and transparency via two key pieces of the regulation: the Sustainable Finance Regulation Directive (SFRD) and the EU taxonomy, the research and consulting firm says in the latest issue of The Cerulli Edge – Global Edition. Technical details are yet to be confirmed, but conformity and transparency are likely to be prominent features of requests for information.
Connor Bigland, an analyst with Cerulli’s European institutional team in London, expects high-level policy statements to be replaced with quantitative measures as the main means of disclosure. “That being the case, the legislation could blur the lines between environmental, social, and governance (ESG) investment and impact investment in its current form,” says Bigland.
The regulation, which will take effect next year, will generate renewed attention on engagement capabilities. Cerulli says asset managers should develop targeted engagement policies that focus on specific issues and sectors.
The incoming legislation is likely to result in the launch of new products tailored to meet the new sustainability requirements. Cerulli says products such as market indices or trackers will probably struggle to meet sustainability requirements.
“It is likely that light-touch ESG re-weighting strategies of many ESG indices at present will mean that related tracker funds will not meet new legislative sustainability requirements while maintaining minimum tracking error. As a result, the legislation will likely trigger the construction of new ESG indices by providers in the market,” says Bigland.