ESG risks should be defined as financial risks by regulators in upcoming changes to several European regulations, some money managers say.
Current proposals, they say, are not sufficiently explicit in defining the financial impact of environmental, social and governance risks on investment performance.
Two European regulators, the European Securities Markets Authority and the European Commission, asked money managers in December to share their views on how to incorporate ESG factors into their processes in three European regulations: the Alternative Investment Fund Managers Directive, Undertakings for Collective Investment in Transferable Securities Directive and the Markets in Financial Instruments Directive. The consultation ends Feb. 19, but managers will get a chance to voice their opinions in a public hearing scheduled for Feb. 4.
The effort to include such requirements in the regulations follows the EC's overall initiative to standardize ESG disclosure — part of its action plan for financing sustainable growth — launched in June. With the action plan not expected to be fully implemented until 2020 at the earliest, sources said, coming under scrutiny now is how all money managers doing business in Europe define ESG factors and manage those risks for institutional assets, as well as how they supply information to their clients.
ESMA is seeking feedback in order to define interim standards that are expected to make their way into the three directives by April 30. The EC wants to approve amendments to the directives before elections to the European Parliament are held May 23, sources said.
These interim rules will set out how money managers should run and report on ESG portfolios until the policy under EC's action plan is completed.
ESMA has proposed six general organizational requirements for managers to:
Incorporate ESG risks within organizational procedures, systems and controls.
Consider resources and expertise required to integrate ESG risks.
Clarify responsibilities of senior managers in integration of ESG risks.
Identify conflicts of interests in the investment value chain arising from integration of ESG risks and factors.
Consider ESG risks when selecting and monitoring investments for investors.
Include ESG risks in risk management policies explicitly.
Money managers interviewed for this story supported the proposals, but singled out that the amendments are not dealing with the financial impact of ESG risk to the degree they expect.
"What ESMA has proposed is fair," said Fiona Frick, CEO of Unigestion in Geneva. "I guess it is not too prescriptive on how managers should integrate and manage ESG."
However, she and other money managers warned ESG risks have not been defined as "material" in ESMA's proposed amendments to the directives. This could lead to the financial impact of ESG risks being overlooked, they said.