Regulatory Compass
The PRI website maintains an excellent regulation database documenting sustainable finance policies around the world. Further due diligence on policies can be sought through the hyperlinks provided in the database. The following provide an overview of responsible investing regulation around the globe and key organisations to follow to keep up with developments.
Figure 15 Cumulative number of policy interventions as at April 2022
Figure 16 Global responsible investment regulation map as at August 2021
The darker shades of green denote more responsible investing policies in that country. The country with the most is Germany (27), followed by Spain (24) and France (24). This is ahead of the US (15), UK (20), New Zealand (7) and Australia (19). The European Union (23) is not included on the map.
Figure 17 Key organisations regarding regulation, disclosure, and standards
Staying Above Board
The growth in managed funds focused on ESG considerations across the globe has warranted reviews by regulators to assess whether the actual practices of Fund Managers match how the products are promoted. Basically, tackle “greenwashing”. The breadth and depth of disclosure requirements are continually developing and differ across investment jurisdictions. The following sections give an insight into recent developments and links for further information.
Australia and the US – Reviews into responsible investing disclosures
In Australia ASIC published the RG 65 Section 1013DA disclosure guidelines in 2011, but more recently in 2022 issued an information sheet on how to avoid greenwashing when offering or promoting sustainability-related products.
At the start of 2021 in the US, the Biden administration sought to address climate and ESG risks through the SEC. Recent actions by the SEC can be viewed here. In May 2022, the SEC proposed amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of ESG factors. Regulatory tailwinds for ESG investing in the US are substantial.
New Zealand – FMA guidance, disclosure framework, and review of managed fund documentation
In December 2020 the FMA published the disclosure framework for integrated products which takes a principles-based approach with the overarching requirement of meeting ‘fair dealing’ provisions. The guidance provides disclosure expectations within the following framework:
- The standard ‘vanilla’ elements of the integrated financial product
- What does the integrated financial product purport to offer beyond a standard financial product?
- Measurement and evidence of non-financial performance
- Internal audit or external assurance provided
- Governance framework
- Risks or costs associated with the integrated financial product
- Consequences of failure
Guidance provided by the FMA in April 2021 for Fund Managers regarding fees and value for money notes the following regarding responsible investment:
- ‘If a scheme claims its asset stewardship, including taking account of non-financial factors within an integrated financial product, adds value, can they substantiate it by demonstrating how it fits member values? Or how it benefits investment outcomes? For example, does it reduce risk without reducing return, enhance return, have quantifiable non-financial impacts, or shape company behaviour?’
In July 2022, the FMA released the report Integrated financial products: Review of managed fund documentation. The aim of the review was to better understand how Fund Managers provide information to help people make investment decisions, including information about the risks and benefits of funds that take a responsible investing approach.
European Union – Sustainable Finance Disclosure Regulation
The Sustainable Finance Disclosure Regulation (SFDR) was drawn up as part of the European Union’s response to the 2030 Agenda for Sustainable Development. The SFDR “…lays down harmonised rules for financial market participants and financial advisers on transparency with regard to the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes and the provision of sustainability‐related information with respect to financial products.“ A key part of the regulation is the concept of “principal adverse impacts” (PAIs), which are the negative effects on ESG/sustainability factors that stem from investment decisions.
The SFDR essentially aims to help minimise “greenwashing” through greater transparency. More transparency enables a more informed investment choice. The regulation addresses requirements for both financial advisers and financial market participants (e.g., fund managers, pension products, venture capital funds etc).
The introduction to the regulation indicates that “financial advisers should disclose how they take sustainability risks into account in the selection process of the financial product that is presented to the end investors before providing the advice, regardless of the sustainability preferences of the end investors.” Increased transparency requirements for financial advisers (unless where there are less than three employees) include the following:
Figure 18 SFDR transparency requirements for financial advisers
Increased transparency for financial market participants (e.g., fund managers, pension products, venture capital funds etc) includes the following:
Figure 19 SFDR transparency requirements for financial market participants
A critical part in the implementation of the SFDR is the ‘regulatory technical standards’ (RTS). These were published in July 2022. The requirements apply from 1 January 2023. In summary, the RTS address the following:
- Specify the details for presentation and content regarding:
- products that promote environmental or social characteristics in pre‐contractual disclosures.
- products that specify a sustainable investment objective in pre‐contractual disclosures.
- Develop standards for the content, methodologies, and presentation of information:
- regarding sustainability indicators in relation to adverse impacts on the climate and other environment‐related adverse impacts.
- regarding sustainability indicators in relation to adverse impacts in the field of social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.
The result of the SFDR is that investment products are categorised according to the applicable Articles and must disclose the information as per the RTS. Basically, a managed fund is now categorised as one of the following:
- No integration of sustainability risks promoted or any sustainable investment objective (Article 6).
- Integrates sustainability risks and promotes environmental or social characteristics (Article 8).
- Integrates sustainability risks and has a sustainable investment objective (Article 9).
The latest version of Beneath the Surface of Responsible Investing can be found here.
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Photo credits: UN PRI, Research IP, Bayram Gurzoglu (Getty Images)
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