SFDR Intensifying ESG Dialogue Between Owners and Managers

Regulatory reform is driving more detailed conversations on sustainable investment strategies, while retail investors increasingly expect evidence of impact.

Europe’s Sustainable Finance Disclosure Regulation (SFDR) is incentivising asset owners and asset managers to work together and engage more on sustainable investments, said Jean-Jacques Barberis, Head of Institutional and Corporate Clients, at French asset manager Amundi.

Speaking at the Responsible Investment Live event, Barberis said SFDR, which requires managers to sort funds into categories according to their sustainability objectives, has had “very concrete effects and is pushing everyone in the right direction”.

In particular, he said, the market is demonstrating appetite for Article 8 and 9 funds, which must have proven sustainable characteristics. SFDR Level 1 rules came into force in March, but more detailed requirements will apply under Level 2 from next January.

“Clients are coming to us and asking what they should do about some of their mandates which have been classified as Article 6 under SFDR. They are not happy about it and want to know how they can change that.” Under SFDR, Article 6 covers funds which do not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG-conscious funds such as tobacco companies or thermal coal producers.

Fellow panellist Diego Liechti, Head of Investment at ethical Swiss pension fund Nest Corporation, said while SFDR was not applicable in Switzerland, the “risk of regulation” was high and therefore asset owners and managers work together to have an understanding on sustainability. “Regulation is a good incentive to get both sides to work closely together, particularly on reporting standards.”

Areas for potential cooperation with asset owners include framing objectives on ESG issues and subsequently helping with their implementation, said Barberis. This includes advising asset owners on short-term options for supporting commitments to net-zero emissions by 2050. “The asset owner can model various options for portfolios and their associated costs, for example. This is where cooperation is really meaningful, delivering an objective and a menu of functions that are available to reach that objective. It is then up to the client to decide what they will do,” Barberis explained.

Measuring engagement

As part of their discussion, an audience poll was conducted to measure the level of engagement between asset managers and owners, with 80% saying they were currently “actively engaged in discussion” with their manager/owner about ESG. The remaining 20% had not, or ‘not yet’ engaged. When asked about key priorities, ESG integration was identified by 100%, with engagement on climate risk and transition polling at 60 and 70% respectively.

Commenting on the poll results, Liechti noted that Swiss retail investors are putting pressure on their pension funds, and the Swiss National Bank, to invest sustainably, leading to hard-nosed discussions about the real-world impact of sustainable investment solutions.

Similarly, Barberis noted the challenges for asset owners and asset managers in demonstrate the results of ESG integration and sustainable investment strategies on company behaviour. “This is a very tricky and complex question, but there is a growing demand for answers, particularly from the retail investor side,” he said.

Liechti agreed, noting that the instrument for change with the “most leverage” is consumer demand. “People’s attitude is changing and they are demanding sustainability from their companies and their products. Measuring the effects of this on the real economy is tough though.”

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