EU regulatory framework contributing to a rise in sustainable investing, but greater clarity & improvements needed

by | Jul 10, 2024

New research from CFA Institute, the global association of investment professionals, highlights the challenges of the current EU ESG regulatory framework including the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation, and offers a series of recommendations for the new parliament. 

The survey of CFA Institute members in the EU points to a broad range of challenges facing EU investors around ESG disclosures, the reliability of data, and the complexity of ESG ratings.  While members want EU regulators to continue to drive the international agenda on sustainability, they also want a focus on more tailored legislation around ESG disclosure requirements to ensure alignment with investor needs.

“This survey of our EU members represents the views of financial professionals across the ecosystem, from large asset owners to boutique asset managers,” said Josina Kamerling, Head of Regulatory Outreach, EMEA at CFA Institute. “One of the reasons we conducted this survey was to understand how our EU members view the current EU regulatory regime, which is meant to support and encourage sustainable investing. We observed mixed views on the topic: while a broad consensus exists that the EU regime is advancing the international agenda on sustainable finance, a similar proportion feel that EU efforts are confusing, and the lack of reliable ESG data does not make it worth integrating ESG considerations in investment decisions. This is a worrying finding, and regulators ought to pay attention to feedback from investment practitioners.”

Key challenges in the implementation of EU legislation on sustainable finance identified by the survey are:

  1. The lack of reliable and verifiable data: The rapid implementation timeline of the applicable EU legislation has forced companies and asset managers to provide required disclosures despite a lack of reliable and verifiable data.
  • More than two-thirds of respondents (65%) said the lack of reliable ESG data was among the biggest challenges for asset managers in implementing the EU SFDR.
  • Almost half of the respondents (45%) said higher costs to collect ESG data and the lack of skilled personnel with expertise in ESG and data collection was among the biggest challenges for implementing SFDR.
  1. According to CFA Institute members, retail investors can be confused by the volume and intricacies of sustainability information, making it difficult for them to use such information to make sound investment decisions.
  • Just under a half (45%) of survey respondents indicated that the quantity and complexity of ESG information often leads to confusion among retail investors when making an investment decision.
  • One in three survey respondents (36%) specifically said the disclosure requirements under Articles 8 and 9 of the SFDR is too complex and makes it difficult for retail investors to fully understand the degree of sustainability impact for funds in which they are considering investing.
  1. The lack of clear definitions in SFDR has resulted in asset managers and companies interpreting existing rules and standards in various ways, leading to a diverse implementation of the EU legislation. 
  • Just under a third (32%) of respondents expressed it was difficult to compare between ESG products as required disclosures are not standardised and comparable across jurisdictions for retail investors.
  • More than a third (37%) of survey respondents believe the EU Taxonomy regulation has been over-engineered, resulting in complexity of information and confusion among investors and stakeholders.

Key recommendations for regulators

To address the concerns highlighted by survey respondents, CFA Institute proposes that EU regulators: 

  1. Continue to drive the international agenda on sustainability. They should focus, however, on developing more tailored step-by-step legislation concerning ESG disclosure requirements and taxonomies to ensure alignment with financial market participants’ needs.
  2. Provide clear and consistent ESG terminology throughout the entire legislative framework on sustainable finance. Clearer definitions would contribute to promoting consistency in the implementation of ESG-related legislation and minimising diverse interpretation of rules and standards.
  3. Consider the significant challenge posed by unreliable ESG data and the associated costs for data collection and training of staff. Such issues are currently limiting compliance with the present disclosure requirements outlined under the EU legislative framework on sustainable finance.
  4. Better clarify the fund categorisation system outlined in SFDR for the disclosure requirements under Articles 8 and 9 of the regulation. A clearer approach could reduce the complexity of ESG disclosures for investors and mitigate greenwashing risks. 
  5. Address the complexity of ESG ratings and the divergent methodologies used by providers. The introduction of disclosure requirements, as foreseen by the proposed regulation on ESG rating activities, is likely to increase trust in ESG rating providers and enhance comparability of their evaluations.

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