Carl Balslev Clausen
Product Manager, Director of ESG Investing, SimCorp
Connect with Carl on LinkedIn
Head of Sustainable Finance at the Danish Financial Supervisory Authority
Connect with Theodor on LinkedIn
Explore the drivers for the SFDR and how it can shape the future of sustainable finance and our planet.
Read the article and learn about:
- The drivers for the SFDR and its impact on capital markets
- The role of regulation in shaping the future of sustainable finance
- The need for transparency and standardization in ESG investments
- Best practice approaches to implementing the SFDR
Foreword by Carl Balslev Clausen, Product Manager, Director of ESG Investing at SimCorp
Over the last few years, ESG investing and sustainable finance have firmly made their way on the capital markets agenda. As I see it, there are two interesting dynamics evolving in the industry.
First, there is significant R&D activity in established companies, as well as a large pool of innovative startups using new and disruptive technologies, to create enriched perspectives on ESG and impact. This includes details on companies’ operations and activities, from their supply chains and internal operations, to the systemic impact of their products and services. But with the growth of sophisticated and granular data, the challenge for the investor becomes standardizing it in a way that is more easily comparable, on a like for like basis, to get a true picture of what they are investing in.
Meanwhile, the difficulty for asset managers lies in fully integrating non-standardized ESG data into their investment operations. Key to overcoming this, is the consolidation of ESG data into the core investment data set and across the front-to-back investment lifecycle. This consistent approach across research, portfolio simulations, risk monitoring, performance attribution and reporting, creates an optimal data overview and supports the growing client demand for ESG data.
Secondly, in parallel with the success of ESG funds inflows, there is some skepticism about the quality and level of commitment to sustainability and societal impact, across the ESG funds offered. It is fair to say that many of the ESG funds recently launched are difficult to distinguish from traditional tech funds. Asset owners already engage in careful due diligence processes when placing an ESG mandate with asset managers, but they also need more support with transparency when it comes to classification of ESG funds.
Industry associations and regulators can play a pivotal role, to drive standardization and ultimately the credibility and legitimacy of the ESG market. There are ESG initiatives in jurisdictions across the globe, but the most comprehensive and ambitious is probably the European Commission’s 2018 action plan for financing sustainable growth, including the Sustainable Finance Disclosure Regulation (SFDR).
As part of SimCorp’s client support and ESG market engagement, we spoke to Theodor Christensen, Head of a newly-formed Sustainable Finance unit within the Danish Financial Supervisory Authority, to explore the drivers for this far-reaching regulation and just how it can shape the future of sustainable finance, and perhaps our planet too.
Carl Balslev Clausen: The Danish Financial Supervisory Authority has formed a new group for sustainable finance, including the monitoring of the incoming EU SFDR regulation. What is the group’s mission and what priorities are you focused on in the coming 12 months?
Theodor Christensen: The unit was established towards the end of last year with a focus on the supervision and the regulation around sustainable finance. This includes the SFDR but we will also be looking at the taxonomy regulation, once that kicks in, and a number of new developments in the sustainable finance area.
Sustainable finance is a relatively new area for us and a megatrend that affects more or less the whole financial sector and also supervisory entities like us. While many of the tools or processes that will be used to supervise this area are the same as those that we use for other areas, this is still a fundamentally different and sometimes unique investment area to work in. It requires having an in-depth understanding on topics like climate change, social issues and what is considered sustainable.
With the SFDR having an impact across capital markets firms in the EU, we decided it would make more sense to centralize the work and build the specific set of competencies needed, to really understand the regulation and the market forces at work and ultimately provide the best foundation to support capital markets firms.
Carl Balslev Clausen: The SFDR is the core focus at present, what is the purpose and intended impact of the regulation on capital markets ESG practices?
Theodor Christensen: Together with the taxonomy regulation, the main purpose of the SFDR is to standardize and harmonize sustainable finance. It will lift the bar significantly with a minimum threshold for what can be called sustainable investment. Before the SFDR, we had no common definitions and no joined-up regulatory framework to distinguish or to categorize what could be called sustainable financial products.
The SFDR provides this framework and together with the taxonomy that will be introduced, it will create a coherent set of rules for sustainable finance, defining what firms need to live up to, to be sustainable and what they need to tell their investors. Ultimately, it is designed to provide the retail investor with clear communication and for financial advisors or asset managers to convey just how sustainable a given financial product is, or make clear when a product is not considered a sustainable investment and why.
What is important to underline is that the disclosure regulation is not a conduct requirement. It's perfectly legitimate to not take sustainability into account, but if you do claim to offer a sustainable financial product, then the bar has now been raised significantly, as to what will actually constitute such a financial product. In our view, it will prevent mis-selling and enhance investor protection and transparency and that will be a game changer for the ESG investing space.