In the alphabet soup of SFDR, CSRD, ESRS, AIFMD, UCITS, MiFID II, not to mention ESMA Guidelines on fund names using ESG or sustainability-related terms and the EU Taxonomy, I can’t help wondering when and where the wave of legislation will stop. Are we bamboozling the industry and investors with disclosure requirements and metrics? Will we get lost in a sea of acronyms and setting the industry up for continuous long-term administrative overload? Is it really friend or foe?

I also question whether all the regulatory changes are really helping develop a more sustainable economy or are they in fact hindering its advancement? On the one hand, the legislation shines the light on how the industry can support positive social and environmental outcomes. Yet on the other hand, there is so much of it, I question if the  intended objectives aren’t being undermined by the levels of complexity to comply, and a very real sense of overwhelm and burden by those that must abide.

Don’t get me wrong. I do welcome the evolving legislative landscape and believe that it is encouraging. Regulation, such as the EU Taxonomy and SFDR contribute to increased transparency for investors, and when applied properly, can direct capital towards sustainable investments, which is very urgently needed. It also promotes social and environmental outcomes beyond the boundaries of the financial industry by broadening the demand for accountability by companies and their value chains. In particular, it is also encouraging to see the uptake of ESG risks as a necessary Boardroom agenda item. It has even found its way to my non-executive director course, which is beneficial for the future of corporate governance and leadership of the companies the industry will seek to invest in.

For many years Triodos Investment Management has expressed support for the regulatory revolution, however there are some clear drawbacks, and the regulation sometimes misses the mark. Most notably is the SFDR requirement for asset managers to prove the sustainability credentials of their funds. They need to go to great lengths to do so, which requires significant time, capacity and financial resource. The burden of regulatory compliance rests fully with the sustainable funds, while the so-called ‘dirty’ funds can do whatever they want without having to disclose anything. This not only fosters unfair competition, it also prevents the end investor to properly compare the impact of investment products (on positive but at least on adverse impacts).

Furthermore, there is very little legislation for ‘non-sustainable’ asset managers, and no requirement to warn investors about the negative social and environmental implications of their funds.
The requirement for sustainable funds to bear the burden of proof seems to be counterintuitive to the goal of directing more capital towards sustainable initiatives. And, frustratingly, it ends up being the investment fund clients, whether professional or individual, that are left in the dark. Investors know they want their money to achieve certain outcomes, but it’s only a few that will seek to understand the detail of the technical specifications sitting behind the fund classifications. It’s like when you purchase a laptop. You know what you need it to do, what you hope it will do, but do you go searching for all the behind-the-scenes detail? Most will not.

In addition, there’s the practice of green hushing. This is one of the unintended and unexpected side effects of SFDR so far. Because of the complexity, many market participants choose not to label their product as sustainable because it's less of a reputation risk and cheaper. This is 180˚ the opposite of what Europe aimed for with the European Sustainable Finance agenda. Let's not make that mistake again and reap the benefits of this learning by coming up with a simpler categorisation that is mandatory for all investment products.

With all this in mind, and the fact that the asset management industry often looks to Triodos Investment Management for its opinion and thought leadership, I am proud of the proposal we put forward earlier this month in response to the SFDR consultative revision initiated by the European Commission. We have recommended a new investment categorisation system, which is simple, clear and enables investors to make properly informed decisions about the sustainability efforts of a financial product. We propose five categories regarding the consideration of sustainability, from 'strong' to 'not explicit’, and apply the key principles of transparency, comparability, and longevity. Importantly, it aligns with the existing definitions of the SFDR and contributes to the true intention of the regulation by providing investors with better opportunity to understand and compare the sustainability of all available products based on the same set of basic information. I hope the European Commission takes heed and adopts our proposal. It would certainly reduce the weight of current reporting for sustainable products, strongly steer investor decisions towards sustainable alternatives, and enable the SFDR to effectively meet its intended purpose.

At the end of the day, however it happens, I do believe that regulatory reporting requirements should not create additional layers of administrative burden for those trying to advance opportunities for investors wanting to stimulate a more sustainable economy. Now, more than ever, we need to make the opportunities for true sustainable investment easier so we can find solutions to address the global challenges we face before it’s too late.