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SFDR Update “Does not Kill Innovation” – AllianzGI

Frankfurt-based asset manager has introduced a new KPI-based approach to connect sustainability to its product strategy and help investors assess real-world impacts.

Recent clarifications to the Sustainable Finance Disclosure Regulation (SFDR) still allow asset managers to innovate their sustainable product strategy while also delivering impactful outcomes to investors, according to Allianz Global Investors (AllianzGI).  

Asset managers have been given the freedom to choose and develop different methodologies and approaches, as long as they maintain transparency,” Dennis Baas, Head of Sustainability Strategists at AllianzGI, told ESG Investor.  

The European Commission’s (EC) responses to questions raised by the European Supervisory Authorities (ESAs) on SFDR do not “kill our ability to innovate”, but asset managers must develop more “proof points” with analytics and KPIs to demonstrate the strength of their products, said Thomas Roulland, Head of Sustainability Standards and Analytics at AllianzGI.  

AllianzGI’s has reinforced its standard for categorising its sustainable funds with a methodology that builds upon, and aims to go beyond, SFDR, particularly with regard to Article 8 funds, which promote environmental and social objectives.  

“Investors are rightly seeing the European Union’s SFDR Article 8 as a minimum commitment for sustainable funds, however, a ‘minimum’ is not good enough,” said Matt Christensen, Global Head of Sustainable and Impact investing at AllianzGI, in a statement.  

“We do not accept this as true to label, so we introduced the principle of ‘two binding elements’ for our sustainable funds range.” 

The long-awaited Level 2 of SFDR came into force on 1 January, requiring asset managers to provide more detailed disclosures to justify categorisation of their Article 8 and (environmental and/or social characteristics) and Article 9 (environmental and/or social objectives) funds. 

In the months leading up to Level 2, some asset managers opted to downgrade various funds to Article 8 to avoid accusations of greenwashing.  

In April, the EC’s responses to questions raised by the ESAs on SFDR last September, provided long-awaited clarity on the that financial market participants carry the responsibility of defining sustainable investments but should disclose their approach.  

KPI-based methodology 

The first binding element of AllianzGI’s approach is its sustainable minimum exclusion policy, which enforces exclusions criteria for portfolio construction related to weapons, coal, international norms and standards, including the United Nations (UN) Global Compact, which would suffice for the Article 8 category under SFDR.  

The second binding element aims to more meaningfully connect sustainability to the manager’s product strategy. In effect, each AllianzGI fund must embed a second element into its investment process, whether that is socially responsible investing (SRI), best-in-class, UN Sustainable Deveopment Goal (SDG) alignment, impact strategies or a new KPI approach. 

This new KPI-led approach considers and addresses environmental and/or social challenges within the portfolio construction process by defining sustainability as a KPI objective that must be met at portfolio level.  

With this approach, the company targets measurable, monitored and reported indicators to track results that are significant enough to drive sustainability in the investment process of a portfolio. 

“The origin of sustainable investing is closely tied to ESG risk scores with approaches such as socially responsible investing (SRI) and positive screening,” said Baas, adding that investors are increasingly questioning the significance of these scores in terms of their real-world impact. Our KPI-approach can help to fill this gap and provide investors with a greater sense of impact” 

The first KPI AllianzGI launched is on carbon reduction, based on intensity of greenhouse gas (GHG), measured asCO2 equivalent compared to revenues. The targets are either a minimum lower portfolio GHG intensity versus benchmark, or a minimum 5% year-over-year portfolio GHG intensity reduction.

AllianzGI plans to further evolve the list of available KPIs to governance, social and planetary boundaries based-KPIs by the end of the year.  

“The introduction of specific KPIs, such as GHG intensity, provides a more tangible measure. For instance, an investor can assess the decarbonisation progress of their portfolio, for example,  if the fund portfolio commits to an annual GHG intensity reduction of at least 5%,” he said.  

According to Roulland, investors are looking for more “proof points” to provide certainty about the targeted outcome and results.  

“With this approach, we are in a position to actively manage the GHG intensity of portfolios, and contribute to shape the pathway to a low emission future,” Christensen said.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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