This Christmas season, I’ve noticed that it takes some extra (potent) mulled wine to suppress the panic in the eyes of many professional sustainable investors. The season’s joys and wonders seem wasted on the poor souls as they leave festive gatherings in a hurry, only after complaining profusely. Overshadowing what was supposed to be the first proper post-pandemic Christmas bender is, I hear, the imminent threat of a swiftly approaching SFDR 2.0.
This January, the EU’s sustainable disclosure framework is up for a major upgrade. In essence, it is an attempt to tighten the rules as, allegedly, asset managers have been using the labelling power of the regulation quite unabashedly as a marketing tool. Self-disclosure, as we all know, comes with the usual set of temptations and limitations. Add to it a plethora of complicated, ambiguous, and sometimes conflicting definitions and rules, and what you get is amazingly fertile soil for lush greenwashing.
No matter how hard the experts have been trying to persuade us that the SFDR is not a labelling exercise (only), the moment the regulators introduced the oddly numbered Article 6, 8, and 9 categories, the battle was already lost. The exclusivity of the deep-green ninth circle proved too irresistible for any manager with sustainability aspirations. And so, it was inevitable that the mass movement had to be reined in at some point.
Rather than running the risk of being caught out by the regulator, many savvy asset managers have recently opted for a pre-emptive exodus, hurriedly reclassifying billions of dollars worth of financial products from Article 9 to Article 8 to meet the onset of more stringent requirements. Lo and behold, even the Article 8 circle, previously conceived to be generously all-encompassing, is seeing some downgrades.
Despite these prudential measures, there is still a lot to be done before the year is over. The revamped version of the SFDR demands both a clear explanation of what is so sustainable in the management of each sustainably labelled fund’s case as well as plenty of details that quants need to dig out to populate lengthy standardised templates.
What scares my friends in the industry most of all, I believe, is the need to assess the sustainable impact of their investments. I have heard the 18 mandatory principle adverse impact statements (PAIS) being described loosely as a “nightmare”, a “pain in the neck”, or worse. You might think that at least measuring GHG emissions should be easy-peasy by now, but we are talking about Scope 3 now, which is far from a trivial exercise. And collecting reliable, accurate data for the other PAIS can be even trickier, the experts assure me.
It is painful, watching the SFDR panic hijacking the spirit of Christmas so unscrupulously. To be honest, I also find it quite distracting. After all, it is still just disclosures we are talking about, not the real thing. Imagine if all the energy sustainability experts are currently pouring into formulating reports and worrying whether they are doing it the right way would instead go into more meaningful pursuits. Like sourcing investment ideas, say, or pressuring corporate villains to abandon their wicked ways. Wouldn’t that be something?
I do wish Santa could bring us all more clarity and purpose so that we can finally focus on what truly matters.
Merry Christmas, everyone!
