As Europe embarks on a wholesale review of the world's biggest ESG investing rulebook, an executive at Deutsche Bank's fund unit says the complete makeover that some in his industry want would be a terrible mistake.
Dennis Haensel, head of ESG advisory at DWS Group in Frankfurt, said he's aware that "the frustration level can be very high" among fund managers after years spent trying to adapt to rules that the European Commission now says may not be fit for purpose.
But if the European Union ends up tossing out major planks of the existing framework, that "would be a nightmare," he said in an interview.
The European Commission launched a consultation into the Sustainable Finance Disclosure Regulation last month, after longstanding complaints from investors and national regulators that its ESG rulebook was full of holes. Some academic studies even suggest that SFDR has helped feed the very greenwashing it was designed to prevent.
Mairead McGuinness, the EU commissioner for financial markets and services, has said the key question she wants answered is whether SFDR is giving investors the information they need to help steer capital toward more sustainable activities.
For asset managers, a key issue they want resolved centers on the EU's insistence that SFDR be used not as a fund labeling framework, but instead as a disclosure regime. In practice, however, market participants have ignored that requirement.
The EU has given market participants until Dec. 15 to respond to its consultation on SFDR.
During an SFDR workshop hosted by the European Commission on Oct. 10, McGuinness said it's crucial to get a "full picture" of how the regulation is working in practice, in order to assess the scope of the overhaul that may be needed.
The EU Commission said it had registered "exceptionally high interest" in the event, and McGuinness promised to arrange more workshops to address the demand from market participants.
EU officials attending the workshop tentatively supported making SFDR's reporting requirements apply to all fund categories. That would create a level playing field between ESG and non-ESG portfolio managers and help investors compare products for sustainability impacts, both negative and positive, they said.
Haensel isn't alone in defending the basic building blocks of the regulation. Laurence Caron Habib, head of public affairs for BNP Paribas Asset Management, said it would be a bad idea to start from scratch. There are "positive elements," she said in an interview.
Last year, fund managers, including industry heavyweights such as BlackRock and Amundi, descended into a wave of SFDR reclassifications that revealed deep gaps in how the regulation was being interpreted. Analysts at Goldman Sachs Group Inc. estimate that the episode resulted in SFDR's most stringent ESG disclosure category — Article 9 — being stripped from about $240 billion worth of client assets.
DWS, which last month agreed to pay $19 million to settle the U.S. Securities and Exchange Commission's probe into its alleged ESG misstatements, was among asset managers downgrading Article 9 funds.
Analysts at Barclays have since warned that the EU's review of SFDR may have significant ramifications for flows within the regulation's weaker ESG fund category, known as Article 8. According to Bloomberg Intelligence, about $6 trillion in client funds are currently registered as Article 8, making it the biggest SFDR fund class.
Habib said the main concern is Article 8, and the huge array of sustainable claims it now covers in the absence of minimum criteria. It's a situation made worse by the lack of consistency in how national regulators within the EU interpret SFDR requirements, she said.
"Expectations aren't the same" from supervisor to supervisor, including the kind of product information they want to see and where they set thresholds for Articles 8 and 9, she said.
"There is a gray zone," Habib said. "Nobody can tell you that your interpretation isn't the right one."
