The news that Aviva Investors has become the first asset manager to be fined for breaching the EU’s Sustainable Finance Disclosure Regulation (SFDR) has divided the market.
Last week, the financial supervisor of Luxembourg, the CSSF, slapped the London-based firm with a €56,000 penalty for failing to align five of its funds with the rules.
One of the five sub-funds in Aviva’s Investors’ Luxembourg SICAV range invests in emerging markets bonds, while the rest are European or global equity strategies focused on either climate, natural capital or ‘social transition’.
One of the funds, the Climate Transition European Equity Fund, is now defunct.
Aviva had chosen to market all five funds as being aligned with Article 8 of the SFDR, meaning they promote environmental and social characteristics.
But CSSF found that roughly 5% of the bond fund was allocated to notes from five countries with ESG scores that fell below the level Aviva committed to in its pre-contractual disclosures.
The prospectuses for the equity funds said they were “primarily targeting” different United Nations’ Sustainable Development Goals.
“The CSSF noted that the measures put in place by the manager did not allow it to ensure that the SDGs disclosed in the fund’s prospectuses were effectively primarily targeted by these sub-funds,” said the regulator in a statement.
CSSF reduced the initial undisclosed fine because Aviva strengthened its monitoring framework and updated the wording of its pre-contractual disclosures in response to the intervention. It didn’t make any changes to the portfolios or investment strategies.
“Aviva Investors worked with the CSSF to ensure that their concerns were swiftly addressed after they were raised,” said a spokesperson for Aviva Investors.
“The CSSF has confirmed that the remedial actions taken by the management company in updating the prospectus wording and updating its monitoring framework are adequate to address their findings.”
But the decision has sent ripples through the market.
One fund manager at a European investment house said he “reacted to it strongly” when he first saw the announcement.
“They are the good guys,” he said of Aviva Investors, an asset manager with a long-standing and generally well-regarded commitment to sustainability.
“Everyone in the industry knows there are so many other funds breaching their own investment policies more brazenly than this under SFDR. It seems really strange that Aviva would be the first target. I hope supervisors are not planning to go after the leaders first.”
CSSF declined to comment on why it chose Aviva for inspection. National supervisors are free to choose how they enforce SFDR, via spot-checks and in response to external complaints, for example.
France’s AMF in July provided a summary of its approach, but other countries have been less open.
Another European fund manager suggested that because SFDR gives asset managers the freedom to set their own sustainability strategy – it just seeks to ensure it is being enforced – the fine may be an indication that Aviva set itself stricter rules than other managers in the first place.
“You just have to set rules you can comply with,” he said, adding: “Maybe they should wear [the fine] as a badge of honour, because if they had really loose rules like some other funds under Article 8, they wouldn’t break them so easily.”
Other fund managers and lawyers told IPE that it was reassuring to see SFDR enforced in practice, because it demonstrated the rules had some teeth and gave the market a stronger sense of how regulators would address potential breaches.
One ESG lawyer told IPE that the enforcement action “will inevitably lead financial institutions to take a close look at their compliance with the rules”.
“This is particularly so as the action was taken by Luxembourg, where many institutions are based.”
But the minimal fine (one portfolio manager described the €56,000 price tag as “a joke”) may not be a strong deterrent, the lawyer noted.
The big question is whether the reputational damage will be enough to send a signal to the market that compliance with SFDR is essential
.Again, insiders were divided, with one suggesting Aviva will take a big reputational hit from being the first ever investor fined under the anti-greenwashing rules, and another saying that all major clients know SFDR is “a complete mess right now” and won’t judge managers for minor incompliance with the rules.
SFDR is currently being reviewed by the European Commission.
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