Is the financial services ESG proposition falling apart?

Deem NaPattaloong our consultant managing the role

We’ve already acknowledged the fact ESG is a runaway train

But as the ESG proposition develops, and becomes increasingly central to how financial services organisations conduct business, a gap is emerging between regulators and organisations. We are seeing a greater level of divergence between regional regulators and more actions taken by companies which suggest they are not taking the ESG proposition seriously. 

These combined actions could devastate the impact of the ESG proposition in investment management.

So, what is actually happening and why should we be concerned? 

The Private Equity Wire recently conducted research which saw 80% of respondents foreseeing ESG becoming the most prominent regulatory focus in the coming years.  This sentiment is coming to the fore a year after the first phase of the EU’s Sustainable Finance Disclosures Regulation (SFDR) came into effect.

Europe’s SFDR was a piece of legislation implemented to combat “greenwashing”, a practice in which investment firms refer to themselves as “sustainable”. The legislation is designed to bring clarity to the term “sustainable” and issue guidelines that must be met for investments to be labelled as such.  

However, there is a real risk of delay to the next phases of the SFDR, which could lead to a ‘product labelling approach’ by some funds, thus devaluing swathes of the ESG proposition.

Moreover, the rules around sustainable finance are constantly evolving and, according to Private Equity Wire, there is a real risk of divergence as local regulators in Europe, US and UK look to move ahead with separate plans.

The impact of Europe’s SFDR on ESG and sustainable investment 

The initial instalment of Europe’s SFDR has been met with mixed reactions. For some, like Joshua Kendall, Head of Responsible Investment Research at asset manager Insight Investment, who in an interview said that “it’s quite clear to me that the transparency agenda is a huge challenge and threat to incumbent investment managers”, he went on to add that he believes the legislation doesn’t go far enough to differentiate between different types of asset or investment organisations, some of which can be harder to collect data for than others. 

With that being said, Europe’s SFDR has had a somewhat positive impact on fundraising vehicles. According to the Private Equity Wire, some fund managers have totally rebuilt their investment strategy or launched new bespoke fundraising vehicles tied to the SFDR categorisation. According to their sources, others have simply formalised existing ESG strategies or continued with a business-as-usual approach.

What does the next phase of ESG regulation mean for investors? 

As mentioned above, there is the potential for SFDR to turn into a fund product label if the delay in phase two is substantial. This has real potential to devalue the entire ESG proposition. The next phase of the regulation in Europe, which is designed to introduce stricter and more prescriptive disclosure requirements, has been delayed until January 2023.

Meanwhile in the US, the SEC wants to increase disclosure requirements on climate-related risk but has extended the period for public consultation up to June 2022 amid a wider resistance. PwC has written an excellent publication which clearly outlines the SEC’s climate disclosure proposal, and what it would mean for businesses. 

Arguably out of the three, the UK is implementing regulation at a much more rapid pace. Task Force on Climate Disclosures (TCFD) rules came into effect in April but under a phased approach, with only the largest UK registered companies and financial institutions required to disclose climate-related financial information on a mandatory basis.

But it is beyond doubt that further regulation is in the pipeline. And firms must be proactive to ensure they aren’t caught unprepared. As we have already seen in in, regulators are not afraid to scrutinise investors on this matter:

  • According to The Wall Street Journal, the SEC is already investigating two ESG funds run by Goldman Sachs Asset Management. It is understood that the fund included stocks with poor governance, and those making money from gambling, alcohol, tobacco, coal and weapons 
  • In May, BNY Mellon was fined $1.5m for claiming that five funds run by subadvisor, Newton, factored in ESG criteria when selecting all securities, but in fact they only did this for some stocks
  • Deutsche Bank and its fund arm, DWS were raided by police in Germany following allegations made by the banks former ESG officer that it had overstated the degree to which its funds were ESG integrated. The SEC is also investigating this matter 

What does the diverging approach in localised regulation mean for businesses?

Although the SEC’s proposals in the US are broadly aligned with the UK’s TCFD. The main source of divergence is the proposed classification approach in the UK. This will also differ slightly from the EU’s SFDR. Moreover, the UK’s forthcoming classification, due at the end of 2022, is also uncertain. According to Private Equity Wire, which cites British government sources, UK regulators may classify North Sea gas extraction as a ‘green investment’, while the EU labels natural gas power plants as ‘transitional’.

Moreover, the SEC is also proposing that funds with ESG in their names must demonstrate that 80% or more of their assets were in a way that justifies their name. 

How can financial services organisations effectively advance their ESG proposition?

With the second phase of regulations coming into effect imminently, organisations must ensure they have embedded their ESG policy and selected the right talent to move their firm forwards.

There is an enormous deficit of ESG talent in the market. And businesses who need to hire must do so quickly so they don’t miss out.

At Marks Sattin, we have a network of specialist ESG recruitment consultants who can place talented professionals in your business to consult on governance, tax, legal, compliance, and change & transformation. This, coupled with our extensive data and analytics stack, means we can accurately benchmark salaries, ensure talent meats regulatory requirements and develop competitor analysis which will help your organisation make informed strategic decisions and take advantage of emerging opportunities.

So, is the financial services ESG proposition falling apart?

Despite some flagrant violations of ESG regulations by top investment institutions and the divergence in guidelines from regulators, ESG isn’t going anywhere. If anything, with the increased regulations and public consciousness surrounding ESG, the proposition is only going to become more potent. 

To move forward, and avoid embarrassing missteps, banks, private equity funds and investors must continue to stay ahead of regulations and invest in the right talent for their business.

 To find out more about how we can help you find top ESG talent, please submit a brief, and a member of our team will be in touch. 

Alternatively, register your details and you will be the first to hear about the latest ESG vacancies.

15/09/22
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