Industry association calls for more consistency in sustainability regulation

A prominent figure in Germany’s sustainable investment market has called for greater regulatory harmony on how sustainable or ESG funds are classified. Roland Koelsch, managing director of QNG, the subsidiary of Forum Nachhaltige Geldangen (FNG), the industry association for sustainable investments in Germany, Austria, Liechtenstein and Switzerland, told Commercial Risk DACH that the current regulatory “hotch-potch” could lead to box-ticking and gold plating. Financial investments are subject to EU taxonomy classification, whereby investments’ compatibility with detailed environmentally sustainable economic activities are mapped. In addition, there is the EU’s Sustainable Finance Disclosure Regulation (SFDR), which places disclosure requirements on financial market participants and their ESG products. The regulation is designed to stop so-called ‘greenwashing’, whereby funds are labelled as ‘sustainable’ without necessarily disclosing the methodology used. A third major new sustainability-related regulation is MiFID II, whereby financial advisers selling products have to designate a target market. Koelsch pointed out that this can lead to a regulatory hotch-potch, with companies becoming too preoccupied with only meeting regulatory requirements. He said: “We need harmony in regulation across taxonomy, the SFDR and MiFID II and especially to avoid national gold plating. The next step is then to roll out the harmonised regulation at a European level.” Moreover, Koelsch warned against placing too much emphasis on meeting every stipulation in every regulation: “It can become really problematic when everything is measured down to the last millimetre and legally construed in a certain way,” he commented. By way of example, he mentioned a case involving an asset manager dealing in social bonds. Although social bonds would normally be considered a sustainable venture with a clear ESG objective, the fund provider didn’t want to submit an Article 9 SFDR declaration. As the wealth manager was not ideally placed to report on some green principal adverse impact indicators, which are integral to Article 9 funds, it was concerned about a forced downgrade in SFDR-classification. In view of the current regulatory uncertainty and the huge amount of estimates when it comes to ESG data, Koelsch recommended a transition period where companies could operate without fear of legal action. This would help the financial world catch up with investor demand for information on sustainability. “The demand is so strong that companies are finding it difficult to cope with all the regulation,” he said. Regarding the quality of sustainability reporting, Koelsch would like to see greater focus on the essentials. He observed: “The main problem is understanding what the reporting means in terms of quality of sustainability.” He illustrated this point by saying that fund data provider Morningstar noted the number of “sustainable” funds (counting Article 8 and 9 products) had doubled within half-a-year, whereas previously growth had been 20%-30% in a year. Looking at these figures, a certain scepticism about the quality of the sustainability is understandable. That’s where externally assigned labels, such as FNG or Nordic Swan can add value, said Koelsch. Going forward, Koelsch sees taxonomy in combination with SFDR as playing a key role in improving sustainability reporting: “It has everything to be a really successful instrument,” he said. “The highly differentiated approach of EU taxonomy is very good. The inclusion of cap-ex and op-ex [capital and operating expenditure] is another big plus point, looking forward to future investments. After all, ultimately it’s all about the great transformation.” In terms of disclosure, Koelsch would like more focus on the content: “It would be good to associate disclosure with a minimum standard in terms of its content. An 80/20 rule for example, meaning focussing on the essentials and neglecting the more time consuming minor details just for regulatory purposes,” he commented. Finally, Koelsch emphasised the importance of pragmatism. He referred to an information portal that classifies rail operator Deutsche Bahn as being involved in weapons and armaments because military hardware is transported by train. It serves no purpose to take categorisation too far, as it is ultimately misleading. In conclusion, although there is still work to be done, Koelsch is positive about the progress made in sustainability reporting during the past couple of years. He spoke of “excellent and huge strides forward” when describing the progress made in generating and implementing regulation. He also expects further improvement, particularly when sustainability criteria are scheduled to be included more in financial disclosures of corporates serving the financial industry as of 2025.

Industry association calls for more consistency in sustainability regulation

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