Conor Joyce, Head of Transfer Agency, Ireland, IQ-EQ:Mass societal change and a new generation of socially aware investors has seen demand for ESG and climate-themed funds explode in recent years. Traditionally ESG and green-themed funds were seen as a niche product offering. However, escalating climate issues combined with a global pandemic have changed this. Irish managers now see that sustainable & responsible investing across all asset classes needs to become a fundamental element of their investment approach.

The EU has been working to set an industry standard with the creation of a sustainable finance framework. ‘Level 1’ of The Sustainable Finance Disclosure Regulation (SFDR) was introduced in March 2021, which imposes mandatory ESG disclosure obligations for the asset management industry. The application of the more detailed Level 2 requirements (SFDR RTS) has been deferred to July 2022.

Clear, legal definitions on sustainability such as this will make greenwashing within the industry a lot more difficult. Fund Management Companies must comply with detailed pre-contractual and additional annual reporting disclosures and make these disclosures in the mandatory templates. These enhanced regulations will benefit all stakeholders, including Asset Managers who are truly committed to a long-term environmental and socially conscious business model.

Proper analysis and enhanced due diligence must be incorporated by firms and managers to ensure that this growing demand can be met without compromise. Financial products purporting to be sustainable or ethical but which in reality do not meet the standards will be detrimental to the industry. We need to see clear and comparable sustainable information to allow investors to make genuinely sustainable investment choices. All managers will need to address how they will meet these current and future requirements from a framework, systems and data perspective. Within financial organisations, the gaps, as well as the opportunities, will need to be identified and managers must adapt and improve their investment and operational processes accordingly.

According to a recent ILIM report, 94% of Irish asset managers now have Responsible Investment policies in place. In order for the industry here in Ireland to thrive and be at the forefront of the ESG revolution we need to see the elimination of greenwash and ensure the proper procedures are in place. All players within the Irish Funds Industry need to be proactive in their adherence to current and future regulations to achieve this.

Derbhil O’Riordan, Partner, Asset Management and Investment Funds, Dillon Eustace: The dramatic move to implementation of ESG policies, and the growth of “green” funds in the past 18 months, has been driven not just by legislation, but, rapidly, by investor appetite. A Bloomberg Opinion piece dated 29 October 2021 summed up the asset management position succinctly with the title “Fund Managers Live on Earth Too, and Seem to Like It”.

COP 26 is generating much discussion on how the asset management industry and capital markets are pivoting towards green investment driven by investor sentiment and shareholder activity. At the end of the second day of the conference, more than 450 financial institutions in 45 countries signed up to a coordinated pledge to a key goal in limiting greenhouse gas emissions that will incorporate carbon emissions into their investment decisions.

The European Commission launched its Sustainable Finance Action Plan in March 2018. Legislation saw the requirement for funds to self-designate, from March 2021, as Article 6 (being funds not integrating any kind of sustainability into the investment process); Article 8 (being “light green” funds promoting environmental and social characteristics); or Article 9 (being “dark green” funds targeting sustainable investments). March 2021 saw the vast majority of in-scope funds chosing to adopt an Article 6 designation, motivated in part by a need to avoid accusations of greenwashing, and in part by lack of reliable data available to meet Article 8 and Article 9 reporting requirements.

The EU rules around ESG implementation for funds have slowly been clarified, and this, together with the rapid increase in investor appetite for green investments, has precipitated a large number of funds previously designated as Article 6 preparing to convert to an Article 8 designation.
The former governor of the Bank of England, Mark Carney, speaking as part of the second finance session at COP 26, stated that the finance industry needs to introduce rigorous climate stress testing, and the introduction of frameworks to handle stranded assets responsibly. European funds, and in particular those designated as Article 8 and Article 9 funds, will for the time being be focused on implementing the existing and forthcoming ESG legislative framework requiring them to integrate sustainability risks into their investment decision processes, organisational structure and risk management systems and to provide periodic investor reporting in a form prescribed by the European Supervisory Authorities’ regulatory technical standards.

Niamh Ryan, Partner, Simmons & Simmons: The trends and focus from regulators globally is transparency and disclosure to investors which is not limited to ESG. It is a challenge for the asset management industry to comply with an ever-evolving regulatory landscape while also continuing with their day-to-day business. As things currently stand, I would say the final Regulatory Technical Standards for SFDR and Taxonomy will need focus from firms. Although the timing as to when they will take effect is July 2022, there is a lot of detail in those requirements which will need consideration and planning for asset management firms looking to promote products which have sustainability themes and objectives.

Asset managers also need to be consistent in their messaging with regard to ESG to ensure that they are actually doing what they say they are doing. Another trend which is not related to ESG but is on the same theme of transparency and disclosure is the focus from ESMA and the regulators on fees paid by shareholders and value for money for shareholders. Fees being charged need to be transparent and appropriate for investors and the Central Bank is increasingly focused on the fees being paid by shareholders and how those fees are disclosed in fund documentation.
Meliosa O’Caoimh, Country Head – Ireland, Northern Trust: We see a dual approach to ESG in our role as asset servicer. Firstly, there is supporting them with regulatory obligations, helping our clients review and comply with new requirements, for example the EU’s sustainability-related disclosure requirements for financial services. We expect the ESG-related aspects of regulatory regimes to evolve and to be a constant feature of client-facing regulatory discussions over many years. We also welcome the clarity of some definitions coming our way.

Secondly, there is a behavioural question. I believe that the longer term issues of climate change cannot be solved without some regulation, but equally, as citizens, we cannot delegate our collective and individual obligations to regulators. Our own individual decisions will drive the success of the ESG agenda - and those decisions in household budgets over time should influence businesses which in turn should influence investment behaviours.

Frank Talsma, Director, Risk & Investment Analytics at RBC Investor & Services: ESG has rapidly become one of the biggest themes in the fund industry and now pops up everywhere in conversations with clients, suppliers and industry peers. ESG is coming of age and is making its way from a front-office investment focus to the post-trade oversight and regulatory compliance space. Given its transversal nature, ESG must be addressed across the investment value chain from front-to-back.
The European Union is at the center of ESG rule making with a goal to create clarity around what is to be considered as ESG (and what not) and to impose common reporting standards (Taxonomy and SFDR). This unfolding regulatory package is a tailwind for the industry to review ESG policies and revamp data analytics and reporting capabilities as investors face significant challenges in comparing ESG products and making informed decisions.

In addition, we are witnessing signs of what can be considered as the beginning of a market backlash on ESG investing, highlighting the need to substantiate ESG claims with data and fact. Solutions for independent validation of fund ESG strategies based on independent data sources will become a valuable tool in a market driven by reputation and trust.

Managers basically need to justify that funds that promote a sustainability objective “do what is says on the tin” through detailed reporting and standardized disclosures in terms of how ESG criteria are integrated in the investment decision process. Further, adhering to leading international frameworks like the SASB and TCFD, along with historical trend analysis and peer group comparisons will become increasingly important. Ultimately the challenge is to evidence how funds are contributing towards ESG goals like decarbonization.
ESG will remain an area of focus for product development in the years to come and practices will evolve from standard activities like assets screening, data & analytics and regulatory reporting, to ultimately handling ESG in a comprehensive standardized and fully transparent way.

Tadhg Young, Executive Vice President, Country Head – Ireland, State Street: Environmental, social and governance (ESG) integration underpins most, if not all, debates about the future of the asset management industry. This aligns with broader commentary on stakeholder capitalism, new forms of corporate governance and an understanding of corporate purpose. As custodians of the assets our clients entrust to us, we have seen a particular surge in sustainability practices, policies, procedures and disclosures across the asset management space over the past year. Regulation has certainly been a driver in the European Union, but, arguably, the health crisis that continues to rampage and manifest globally is a contributing factor as well.

Central banks, policymakers, investors, companies and other stakeholders increasingly consider that environmental and societal related issues can pose a systemic risk to the global financial system. That in itself is a notable trend: a shift in focus from climate change to the full spectrum of sustainability risks and the EU already looking to extend its green taxonomy and disclosure requirements to social issues.

The role of sustainability factors in investment approaches are vastly more sophisticated today than several years ago, and broadly fall into three categories:

1. Those that are designed to generate a positive social and/or environmental impact and capitalise on a particular set of ESG goals first and foremost above other investment considerations (“impact investing”);
2. Those that explicitly capture the financial risks and opportunities presented by research of sustainability materiality to the risk and return profile of an investment; and
3. Those that deliberately ignore any sustainability considerations and exclude consideration of such factors in the investment process.

A clear and comprehensive understanding of these distinctions between the use of sustainability factors in investment approaches is critical – notably, impact investing focuses on a specific sustainability “outcome” whereas ESG integration may be comprised of various gradients that legitimately contribute to the overall sustainability transition. In view of the evolving EU regulatory landscape, asset managers, service providers, companies, supervisors, and other stakeholders urgently need to contend with varying definitions of an environmentally-sustainable investment, otherwise face increasing scrutiny around allegations of so-called greenwashing. Common global standards underpinning sustainability investing will be important in mitigating these concerns.

Ross McCann, Head of Fund Services in Alter Domus Ireland: Clearly, investor demand has been driving capital towards green and sustainable investments in a major way over the last few years. Managers have responded accordingly with fund strategies aimed at capturing this investor appetite.

Disclosure, reporting, and governance standards have struggled to catch up, and in their absence, a broad spectrum of self-defined measurements and KPIs have emerged, leading to poor transparency for investors and the rise of ‘Greenwashing.’ National policies, international agreements, and action plans such as the EU Sustainable Finance Action Plan on tackling climate change are now increasingly feeding into major waves of new legislation and disclosure requirements.

The incoming EU Sustainable Finance Disclosure Regulation (SFDR) is introducing Regulatory Technical Standards (RTS) for managers and goes some way to ensuring transparency for investors. Given that the RTS becomes applicable at the beginning of 2022 along with certain elements of EU Taxonomy Regulation, managers see a tsunami of new requirements coming their way. Implementation of these standards will be their main focus, particularly over the next 12 months.

As with all major new disclosures and reporting requirements and in the absence of a single international standard, many managers will struggle with this implementation without external expertise and support. This has created an opportunity for advisors, with most financial service providers and consulting firms already offering various support services. There is also significant industry collaboration, such as a joint effort among larger managers to create a common ESG scorecard.