The current European Union ESG regulatory framework, including the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation, faces critical challenges, according to a new piece of research conducted by the CFA Institute.
The ‘CFA Institute survey report on the ESG regulatory framework in the EU’ paper points to a range of challenges facing EU investors around ESG disclosures, the reliability of data, and the complexity of ESG ratings, especially in the case of SFDR.
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, the study found.
“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,” said Josina Kamerling, head of regulatory outreach, EMEA, at the CFA Institute.
“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,” she said.
“This is a worrying finding, and regulators ought to pay attention to feedback from investment practitioners,” she warned.
Challenges and recommendations
Among some of the key challenges in the implementation of EU legislation on sustainable finance identified by the survey was a 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, according to the CFA Institute.
More than two-thirds of respondents said the lack of reliable ESG data was among the biggest challenges for asset managers in implementing the EU SFDR.
In addition to this, 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 of respondents said it was difficult to compare between ESG products as required disclosures are not standardised and comparable across jurisdictions for retail investors, the research found.
Key recommendations offered by the CFA to regulators include, continuing to drive the international agenda on sustainability, providing clear and consistent ESG terminology throughout the entire legislative framework on sustainable finance. As well as considering the significant challenge posed by unreliable ESG data and the associated costs for data collection and training of staff.
Lastly, the CFA Institute stressed that regulators should also better clarify the fund categorisation system outlined in SFDR for the disclosure requirements under Articles 8 and 9 of the regulation and address the complexity of ESG ratings and the divergent methodologies used by providers.
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