Institutional investors in Europe have been increasing manager monitoring to ensure they are getting the best environment, social and governance results.
Investors are up against a March deadline to show how they have incorporated ESG factors into their portfolios under the European Union's Sustainable Finance Disclosure Regulation. First agreed to in 2019 by European institutions, the regulation puts an obligation on both investors and managers to show how their portfolios influence the environment, climate change and biodiversity. Investors and managers also need to show how they align with the EU taxonomy of environmentally sustainable activities.
And investors say they will not work with managers that are not demonstrating robust ESG integration and are not scoring high on investors' own ESG criteria.
Investors appear to be moving more decisively toward complying with the new rules than their money managers. A survey of 300 institutional investors in Europe published on Oct. 19 by PricewaterhouseCoopers Luxembourg showed that 77% will stop buying funds that do not demonstrate high levels of compliance with the new ESG requirements in 2022. The same report showed that only 14% of 200 surveyed managers will stop selling non-ESG strategies after that year.
While investors say they are not immediately going to terminate managers with an offering that isn't meeting their ESG requirements, they are making their manager selection and monitoring processes stricter. Sources said that managers that fall below investors' expectations will not be extended when their contracts are due to be renewed.
Meanwhile, managers said they are facing challenges with repurposing their traditional strategies into an ESG version and some believe not all of their strategies could be converted. Under the SFDR rules all financial market participants, including money managers, must integrate ESG risks into their investment processes and products. By 2022, the regulation will be reinforced with amendments requiring similar integration to those mandated under other EU financial services directives, such as the Alternative Investment Fund Managers Directive and Markets in Financial Instruments Directive II. Sources said mixed requirements from investors when it comes to exclusions, for example, could lead to assets being moved into segregated accounts or managers being forced to launch brand new strategies.