Europe

ESG Explainer: Comparing Apples with Apples

The European ESG Template is designed to improve comparability of ESG funds and could help to drive the sustainable investment market.

Developed by industry consortium Financial Data Exchange Templates (FinDatEx), the European ESG Template (EET) has been designed to facilitate the exchange of data between product manufacturers and distributors across the financial services sector to fulfil various ESG-related regulatory requirements.

These include the Sustainable Finance Disclosures Regulation (SFDR), relevant provisions of the Taxonomy Regulation and the relevant delegated acts complementing the revised Markets in Financial Instruments Directive (MiFID II) and Insurance Distribution Directive (IDD).

“Fund managers are now being asked to fill out the EET,” says Andreas Stepnitzka, Deputy Director, Regulatory Policy at EFAMA. “Given that insurers (falling under IDD) and investment advisers (falling under MiFID) will have to integrate ESG considerations into their advice processes from 2 August, it is recommended that the EET is being delivered from 1 June 2022 to allow distributors sufficient time to consume the data and adjust their process.”

This explainer outlines the steps being taken to standardise ESG data exchange and the EET’s possible impact on sustainable investment.

What is the EET?

The EET is the latest template from FinDatEx, a joint structure established by representatives of the European financial services sector. A working group of 80 people developed the EET over 18 months. FinDatEx coordinates, organises and carries out standardisation work to facilitate the exchange of data between stakeholders in the application of European financial markets legislation, such as MiFID II, the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation and Solvency II.

The EET is relevant to insurers, distributors, fund of funds and other financial market participants, financial advisors, fund managers. And, of course, their customers.

The objectives of the EET are the exchange of machine-readable ESG data in relation to financial products in order to allow distributors and intermediaries to fulfil their requirements under SFDR and MiFID II; insurers to fulfil their requirements under SFDR and IDD; and manufacturers using underlying funds/financial products/structured products to fulfil their SFDR reporting requirements at products and entity level.

The EET introduces the concept of establishing clients’ sustainability preferences during advice processes to align with the requirements of MiFID II and IDD. From 2 August 2022, under MiFID II and IDD, distributors and insurers will have to ask investors about their sustainability preferences. To determine which funds are suitable for these investors, distribution platforms and insurance companies will need these funds’ ESG data. If they do not have it, they will not promote these funds.

With regard to SFDR, the EET provides an overview of the regulatory requirements from the regulatory technical standards (RTSs) under SFDR level 1, which will apply throughout the European Economic Area on 1 January 2023. This will both ease the process for financial market participants when exchanging ESG data, as well as facilitate compliance to the delegated acts complementing MiFID II and IDD, says Anna Blake, Sustainability Analyst at Greenomy, a green fintech that has developed a platform to consolidate ESG reporting requirements.

By enabling the exchange of machine-readable ESG data for financial products the EET will enable manufacturers using underlying funds/financial products, such as funds of funds, and distributors to fulfil their SFDR reporting requirements and principal adverse impact (PAI) statement at both the product and company level. The SFDR’s PAI regime requires financial market professionals to provide extensive disclosures on various ESG-related matters, including environmental and social indicators.

Is the EET being widely adopted?

EFAMA’s Stepnitzka says there is a “very high level” of awareness of the EET. This may be due to the topical nature of the template, but also because FinDatEx templates have become the “de-facto gold standard” for data exchange between product manufacturers and distributors on a number of regulatory initiatives including MiFID, PRIIPs and Solvency II, he says.

Greenomy Head of Sales Charles Seigle-Goujon says most asset managers are aware of the existence of the EET. “Its adoption will be facilitated because of the other templates that have been developed by FinDatEx,” he says.

There are two key regulatory deadlines for the submission of the EET. The sustainable preferences of clients for MiFID II and IDD must be submitted by 2 August 2022, while data for SFDR and the EU Taxonomy Level 2 must be submitted by 1 January 2023. FinDatEx recommended financial participants meet intermediary deadlines of 1 June 2022 for MiFID and IDD and 1 November 2022 for SFDR and the Taxonomy. This is in order to enable enough time for the collection, computation and production of the required initial data fields.

Is the EET easy to use?

Seigle-Goujon says the EET is one of FinDatEx’s largest templates, covering 600+ fields and addressing multiple stakeholders. “The calculations that are required for the SFDR and EU Taxonomy indicators are complex and asset managers will be turning to service providers to help them with this.”

But not all the 600 data fields are always relevant, particularly in the phase from 2 August until more SFDR data becomes available in 2023. “The group designing the template have tried to specify which fields are completely essential for MiFID/IDD purposes,” says Stepnitzka.

The complexity reflects the EU regulations, rather than of the template itself. “Many users are overwhelmed when first opening the EET, but FinDatEx has tried to provide some explainers such as a presentation and explanatory recordings to help people understand how to use the EET,” he adds.

In addition, the specific EU regulation to which a field refers is clearly indicated, meaning users need fill in only the relevant fields for their clients.

The content of the EET fields is defined by the regulations that apply to the specific financial product in question. For example, the SFDR information on sustainable and non-sustainable product related sections include disclosure; sustainability preferences; EU Taxonomy related information; screening criteria; and Article 8 and Article 9 information.

The template will also contain information on PAI indicators relating to investment in investee companies, investment in sovereigns and supranational, and investment in real assets, thereby covering MiFID/IDD related questions.

What are the advantages in using the template?

A founding member of FinDatEx, EFAMA sees very strong advantages for using the EET, says Stepnitzka. “The idea of any FinDatEx template is to create a ‘common language’ which translates the regulatory requirements into machine-readable data. By adapting to this language, you should be assured that you are providing the necessary information to your distribution partners and also are avoiding that you receive a similar, but not the same, data request from them.”

The FinDatEx templates are designed and endorsed by the EU banking, fund management, insurance, pensions and structured product associations, he notes. “FinDatEx templates are not compulsory, provided to the industry free of charge and are free of any intellectual property rights.”

Seigle-Goujon says in providing a concrete means of exchanging data between fund managers and their institutional clients, the EET will benefit the whole industry and will accelerate sustainable finance, enabling investors to choose and compare funds based on ESG criteria and creating transparency.

What impact will the EET have on ESG investment funds?

Greenomy’s Blake says EET will make it much easier for asset managers and investors to compare the sustainability of funds. “This should expand the ESG universe, attracting more capital towards sustainability funds and accelerating the green transition. It will help institutional investors and other market participants to compare apples with apples and help clients integrate the EET criteria into their fund selection.”

Over time, she adds, the EET could facilitate the exchange of ESG data related to new EU regulations. Ultimately, it could be expanded globally as green taxonomies similar to that of the EU are “springing up all over the world”.

Seigle-Goujon warns that a current downside of the EET is that many fields address only funds that have a stated ESG purpose. “We feel it should cover non-ESG funds as well as some of these funds could be eligible for ESG status. The template could also reveal funds that claim to be ESG but are not.”

When it comes to data exchange, one of the most important points is the quality of the data, he adds. The mandatory reporting of ESG metrics is still in its infancy with, for example, the EU’s Corporate Sustainability Reporting Directive still under development.

“End-to-end platforms can help asset managers to collect data from a corporate and then pass that on through to end clients. The EET is the tip of the iceberg – if you look at the EU Taxonomy as a whole, it connects corporates with fund managers and the EET connects fund managers to institutional investors,” says Seigle-Goujon.

Financial market professionals should consider using platforms that cover the end-to-end process in order to ensure data quality throughout, he adds.

How will the template develop over time?

Stepnitzka points out that all of FinDatEx’s templates are reviewed at regular intervals when required by the regulations. “On the EET this is almost certain, given the swift pace of how the regulatory framework develops.” The EET working group is scheduled to meet again in September 2022 to take stock of EET V1.

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