Asset managers support SFDR but concerns remain over impact on boutiques

Reporting rules scrutinised

Members of the boutique asset management think tank Independent Investment Management Initiative (IIMI) are largely in support of the European Union's Sustainable Financial Disclosure Regulation (SFDR) rules, but a "significant minority" are vocal in their concerns about the regulation.

A survey from the think tank formerly known as New City Initiative showed more than three quarters of its members believe they will benefit from complying with SFDR, with 61% of respondents believing that the new EU rules that came into effect in March will improve competition in the asset management industry.

Still, 22% feel it will have a negative impact in this respect.

The poll is included in the IIMI's paper Regulating ESG: A step in the right direction, which revealed other concerns from asset managers regarding SFDR.

Some IIMI members argue the rules could disadvantage boutiques as the extra costs will be felt disproportionately.

New City Initiative think tank rebrands as Independent Investment Management Initiative

The EU's SFDR has imposed heightened ESG reporting requirements on asset managers at both an entity and fund level. One member said managers would strive to become more ESG compliant in order to win mandates from sustainability focused institutional and retail investors.

"In general, the industry seems to be quite supportive of the SFDR as it will help facilitate consistency," commented Owen Lysak, partner at Simpson Thacher.

Some members are calling on EU regulators to cap the amount which data providers can charge for ESG research and analytics, in order to create a more even playing field between boutiques and larger firms.

The survey shows only a minority of IIMI members (27%) have hired ESG specialists to deal with the regulations. Meanwhile, 66% said ESG work is already integrated into their investment team's processes.

There is also some uncertainty around the Article 8 designation, which IIMI is calling for clarification on. Under the rules, those funds that have sustainable investment as their ultimate objective will be designated as Article 9 products, which carry specific disclosure requirements under the SFDR.

Even funds that are not primarily sustainability funds - but which do promote ESG characteristics to some extent - could be designated as being Article 8 products.

There are also disclosure requirements under SFDR. There is debate as to how sensitive the trigger for Article 8 classification will be, and whether simply taking into account specific ESG criteria as part of the investment decision-making process is sufficient to bring a fund into that classification.

Raising the bar: SFDR to lead to 'uptick in name and strategy changes' as firms adapt

Lysak noted: "These disclosure requirements under SFDR will require managers to complete a disclosure template, in which they must outline their sustainability features.

"The template, which will be mandatory from 2022, is expected to be quite granular in nature - requiring impacted managers to make both quantitative and qualitative disclosures about sustainability impacts.

"This issue has generated enormous discussion at a number of industry associations."

Nick Mottram, IIMI's chairman, said: "As scrutiny around ESG in asset management continues to grow, this research suggests our members largely believe SFDR can be a force for good in the industry.

"However, IIMI's membership is diverse and there is a significant minority which believes the new rules will hamper competition, favouring the resource-rich, larger firms at the expense of smaller, independent, entrepreneurial firms.

"Additionally, there are reservations regarding uncertainties around Article 8 designation, and we do believe that these need to be clarified."

Mottram added: "IIMI fully supports the principles behind an ESG taxonomy as we believe that it will be vital in eliminating the risk of greenwashing, which is an issue of concern in the industry. We also can't stress enough how important it is that ESG standards across major markets do not diverge excessively, so as to avoid unnecessary confusion.