Josina Kamerling, Head of Regulatory Outreach, EMEA, CFA Institute, says Europe is only at the “beginning of the beginning” of its sustainability journey.
Europe’s financial sector is grappling with a cascade of environmental, social and governance (ESG) regulation, and it should ready itself for more.
From mandatory sustainability disclosure rules including the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) to climate-specific reporting requirements driven by the Task Force on Climate-related Financial Disclosure , there is a concerted effort by policymakers to ensure investors have access to all the information they need.
Much of the regulatory infrastructure remains to be put in place. As well as updates to disclosure requirements mentioned above, there is also the ongoing evolution of the green taxonomy (and its social and brown extensions) to contend with, as well as plans for rules on sustainable corporate governance, alongside the development of sustainability-focused reporting frameworks.
Josina Kamerling, Head of Regulatory Outreach for CFA Institute for the Europe, Middle East, and Africa, says a survey of its membership undertaken during the Covid-19 pandemic in March this year revealed that 51% thought the focus by securities market regulators on increased disclosure “properly addressed the situation in line with their mandate”.
This is an improvement on the 75% in the previous year’s survey who said disclosure legislation was insufficient.
Kamerling says: “We have seen the shift in perspective from members with more believing the that regulators are partnering with the industry. Instead of regulators saying they don’t want to speak about certain issues, they are now looking for answers. They don’t want to stultify the markets; they want to protect and stimulate them.”
However, Kamerling says the regulatory picture is far from perfect. As an example, she points to SFDR’s Article 8, which has cause considerable confusion for the industry.
An Article 8 fund “promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practice”. But the regulation lacks further detail making it hard for fund managers to comply. In some cases, Kamerling says, this has led to ‘greenwashing’.
She says: “The industry has moved to use [Article 8] as a label and classification, and the EU was not intending that. There is a risk of greenwashing because the legislation is too vague on what qualifies [as an Article 8 fund], and the industry needs to be more specific.”
Beginning of the beginning
Kamerling also adds her voice to the increasingly loud calls for greater standardisation of sustainability-related regulation and policy across borders. Any suggestion that the financial services sector is closer to achieving harmonisation on ESG issues is met with a knowing smile.
“The Finnish MEP Sirpa Pietikainen said it best when she said the whole sustainability package is not at the beginning, nor is it at the end; we are at the beginning of the beginning. I think that says it perfectly,” she says.
Kamerling says the financial services sector is ‘a market that is still looking for itself’ noting that there are still issues in accessing relevant sustainability data and with unequal methodologies applied to reporting.
“It is no surprise that it is all over the place,” Kamerling says. “You have to remember that company law is national and so is corporate governance. There are so many moving parts, and it is a challenge to bring all this together.”
This poses particular challenges for the European Commission’s plans to regulate sustainable corporate governance practices, which would impose environmental and human rights due diligence requirements on corporates, reaching along their supply chains.
Part of the broader challenge is deciding where regulation fits into the sustainability ‘journey’. Kamerling says she is engaged in “hot debates” with fellow stakeholders over the future of sustainability and corporate governance, and where legislation should fit.
“Should [regulation] be at the beginning, the middle or end of the process?” she asks.
In other words, should behaviour drive regulation or vice versa.
Kamerling says she is “waiting with bated breath” for the next steps for Europe’s sustainable corporate governance initiative. In particular, the CFA Institute is interested to see how the proposed legislation will tackle ESG issues in company supply chains.
“Issues with due diligence on suitable corporate governance in the supply chain is one of the big elephants in the room,” she says.
This was particularly true during the Covid-19 pandemic which, as the European Parliament says, ‘”exposed the vulnerabilities of global supply chains” making clear that “voluntary rules alone are not enough”.
Kamerling says: “My personal opinion is we need to look at how professionals in finance, and those in companies and their investors see their own behaviour and their own responsibilities. That is particularly important a when we talk about a double materiality [how sustainability issues affect their business and about their own impact on people and environment].”
She adds “You have to look at these groups and ask how they are behaving. Are they behaving in a way that’s moving towards a sustainable economy?”
The CFA Institute would also like to see a European directive on sustainable corporate governance make better provisions supporting effective stewardship, giving stakeholders more influence over companies’ longer-term strategic decision making.
Reflecting this direction of travel, the world’s largest asset manager, BlackRock, announced last week that from 2022 it will expand the voting choice options for institutional clients invested in index strategies.
However, the CFA goes further and wants minority shareholders to be able to flex their voting muscles more easily.
The Institute says it is “particularly concerned” about the scarce level of protection that is given to minority shareholders, and encourages EU and national regulators to further improve the rules on the exercise of shareholder rights and accountability for minority investors.
Much of the recent flurry of ESG activity, be that regulatory or from industry, is motivated by the imminent COP26 summit. However, Kamerling says the conference is “too high level” to bring any meaningful change to the behaviour of investors and companies in the short term.
“COP26 can help in the sense that you can say it is urgent and that we have to do something which is important, but that is not enough. We need to convince companies that if they want to make money, they must be sustainable,” she says.
For its part, the CFA Institute “cannot wait anymore” and will be “walking the talk” on sustainability, adds Kamerling, pushing the profile of ESG themes globally.
To this end, former IOSCO Secretary General Paul Andrews was appointed Managing Director of Research, Advocacy and Standards earlier this year to “oversee the strategic direction and leadership of the function to position CFA Institute as an innovator and thought leader in investment management”.
If Europe, as a global leader, is only at the beginning of the beginning on sustainability, Andrews, Kamerling and team have their work cut out.