The ESG trend is here to stay – which means complying with SFDR is essential

Level 1 of the sustainable finance disclosure regulation (SFDR) is taking place from 10 March with some specific disclosure requirements. How do market participants in the EU embrace Environmental, Social and Corporate Governance (ESG) standards, as popularity in these products continue to grow?

The European Commission has defined an ambitious sustainable roadmap towards with the goal of achieving targets agreed at the Paris conference of parties (COP21)[1] by 2050. One of the significant regulatory changes taking place in the European Union (EU) is the implementation of the sustainable finance disclosure regulation (SFDR), which will kick off on 10 March 2021.

The SFDR is a great opportunity for institutional and private clients to demonstrate their commitment to Environmental, Social and Corporate Governance (ESG).

ESG on the rise

In November 2020, the European Fund and Asset Management Association (EFAMA) reported[2] that €10.7tn or 45% of total asset under management (AUM) in Europe at the end of 2019 was invested in some form of ESG selection strategy. These strategies were divided in two types: the exclusion or systemic integration of ESG risks and opportunities.

In the same report it was also revealed that ‘impact funds’ – with clear sustainable investment strategies – represent the smallest segment, with just under 1% or €150bn of investment fund AUM.

This indicates that, although the market’s progressively turning towards ESG investment, there are huge opportunities for those investments to really make an impact. As EFAMA states: “Despite impact investing remaining a nascent field, it is attracting growing interest among both institutional and private clients.” Amongst others, private equity firms are showing appetite for integrating ESG considerations. More than 500 of them are signatories of the Principles for Responsible Investment (PRI)[3]. And, according to a Bfinance report[4] published in February this year, another 60% of asset owners are “unlikely” to hire equity managers that are not signatories of the PRI.

The EFAMA report expects “further growth […] in this market, particularly as new regulatory measures (EU Taxonomy and Disclosures Regulations) and other industry initiatives contribute to harmonising its definition.”

An urgent need to comply

Last November, research by insurance company Aviva[5] – of more than 500 people with investments – reported that the pandemic has increased public interest in sustainable investing. In fact, more than half (55%) of those surveyed said that the pandemic had had an impact on their likelihood to take ESG factors into consideration when deciding where to invest their money. And according to PwC, more than half the money invested in funds in Europe, could be managed by explicitly ESG strategies by 2025[6]. The audit firm’s survey predicts that the “absolute level of those ESG assets will at least triple, so they make up between 41% and 57% of the total in funds in Europe by 2025, reaching between €5.5tn and €7.6tn.”

As the focus on ESG investments grows, financial market participants will need to prepare to comply with the upcoming waves of regulations and to be able to grasp the growing expectations for sustainable investments.

How we can help you

Intertrust Group is working with clients to help you in your transition to sustainable finance and support you in complying with your regulatory obligations.

We partner with you to help you reach informed decisions, benefiting from the expertise gained from our large global client population and industry network. We endeavour to provide you with best in class industry solutions, flexible enough to meet individual needs.

[1] Adopted by 196 Parties at COP 21, the Paris Agreement on climate change entered into force in November 2016 to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels.
[2] Sustainable investment in the European asset management industry: defining and sizing ESG strategies, EFAMA, 19 November 2020
[3] The PRI is a United Nations supported network of investors, who aims to understand the investment implications of ESG factors; to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.
[4] ESG asset owner survey, how are investors changing, Bfinance, February 2021
[5] Interest in ESG investing boosted by Covid, Aviva, 29 October 2020
[6] 2022 – The Growth Opportunity of a Century, PwC Luxembourg, 4 November 2020