Is your fund really “green” if your fund administration is not?

While monitoring the upcoming regulations, EFA has not waited on taxonomy to act on ESG. For years, not only it takes measures to reduce its impact on environment but also to ensure a high level of ethics and human rights. The result is yet another ECOVADIS Gold Award but mostly the assurance for EFA clients that their funds stay green along the value chain.

ESG and sustainability: a growing challenge for the asset management industry

Environmental issues impact every sector of activity, and that affects investment funds as a key source of financing to the economy as a whole. With regulators starting to draw up rules for the asset management industry on environmental reporting and risk management, the trend among asset managers is toward incorporating environmental, social responsibility and governance criteria into their investment strategies. But a coherent and harmonised framework for ESG investment and ‘green’ funds is still some distance away.

According to Luxembourg’s fund industry group ALFI, the grand duchy is now home to 31% of all EU sustainable funds and 39% of their assets. The European Fund and Asset Management Association claims that sustainable assets constitute more than half of the European fund industry’s €25.2 trillion total.

It seems clear that investment managers are paying much greater attention to environmental and social concerns, which are becoming an important if not necessarily overriding consideration for younger investors in their financial planning decisions. In addition to investment managers’ own convictions that they need to address climate change issues, there is also growing pressure from legislators and regulators.

The biggest problem is there is still no agreement on what constitutes a sustainable company or activity. Even among research firms and index providers, the same company can be categorised very differently depending on the criteria they use. The European Commission’s initiative to draw up a taxonomy - a definition and classification structure - for sustainable investment is a laudable attempt to bring order to the issue, setting out technical screening criteria for 67 activities across eight sectors that can make a significant contribution to climate change mitigation.

That should help asset managers to meet their commitments under global initiatives to quantify and report on the environmental impact of their investment portfolios. Projects such as the Global Report Initiative and the Task Force on Climate-related Financial Disclosures are now in the process of being incorporated into legal requirements across the EU, Latin America and Asia, as well as to a lesser extent in the US.

In Europe, the Commission’s Action Plan on Sustainable Finance is already leading to concrete regulatory proposals for funds under the UCITS and AIFMD regimes, from disclosure requirements for funds and their management companies to green benchmark rules. The European Securities and Markets Authority is clarifying the duties of all fund stakeholders to counter so-called greenwashing in the misrepresentation and mis-labelling of sustainable finance products and strategies.

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