Just months before hundreds of major financial institutions committed to net-zero-aligned portfolios by 2050 at COP26 in November of last year, German regulators launched an investigation into Deutsch Bank’s asset management arm tied to claims that it overstated its ESG credentials. Earlier this month, German police raided the offices of DWS on alleged “prospectus fraud” for exaggerating how “green” the asset manager’s marketed funds were.
Driving performance through data quality
Few would defend cases of financial institutions fraudulently mislabeling funds as green. However, investors have long complained that they lack the quality data needed to accurately apply ESG metrics to companies, bonds, or other investment products to conduct proper due diligence. For the past two decades, non-profits such as CDP have harnessed investors’ requesting authority to persuade thousands of companies to voluntarily disclose their climate-related risks, opportunities, and emissions on an annual basis in line with the recommendations of the TCFD. While the data gleaned from voluntary disclosure is helpful to investors, there are often gaps and questions about reporting reliability.
Although many leading investors have long recognized that corporate environmental data are financially material, most regulators have been slow to mandate climate-related disclosure as they do for other financial risks. The European Union has been at the vanguard of adopting rules around sustainability-related disclosure. In late 2019, the European Commission published the Sustainable Finance Disclosures Regulation (SFDR) to “to assess the sustainability performances of financial products” and prevent greenwashing. The SFDR, which came into effect in March 2021, mandates “financial market participants” to disclose both the ESG-related risks on their investments as well as their investments’ “Principal Adverse Impacts” – or the negative effects they could have on a range of sustainability factors in the real economy.
In late March of this year, the SEC – which for years has lagged its European counterparts on climate-related regulation – released a 500-page proposed rule to mandate climate-related disclosure for U.S. public companies and foreign private issuers. The SEC’s proposed rule faces serious hurdles such as litigation from corporates and opposition from congressional Republicans. That said, many major US banks, pension funds, and other investors have rallied to support the rule and its potential to streamline ESG data reporting and enhance access.
Tackling responsible, sustainable investing
In addition to these recent rules to standardize environmental disclosure of climate risk, global regulators have also rolled out a number of regulations that aim to define and standardize ESG products and services. These rules are tied to a lack of global standards on how investors should market ESG-labelled funds and, ultimately, an explanation of why the fund has been labelled “sustainable” or “green.”
The SEC recently proposed a pair of new amendments to the Investment Company Act “Names Rule,” in an attempt to bolster transparency on the extent to which ESG-branded funds and the investment strategies and portfolios that underpin them are aligned. Days after the SEC’s announcement, the European Securities and Markets Authority (ESMA) published a briefing aimed at promoting transparency and guidelines for the use of sustainability-related terms in funds’ names. The ESMA briefing is intended to provide granularity on an existing piece of regulation, the EU Taxonomy. The Taxonomy provides a standard for which economic activities – including the selling and marketing of financial products – qualify as environmentally sustainable.
Anthesis can help prepare you for this rapidly changing landscape with an approach that goes beyond the mandatory or required financial disclosure to mitigate the risks that pose the biggest threat to the organization. Anthesis has extensive experience in developing robust climate change and environmental information, and we have worked with a wide range of companies, including many from the financial services sector. We can assist you from undertaking a high-level analysis of risk and disclosure through to the completion of a more in-depth climate risk and opportunity profile to allow your organization to build resilience.
This blog was authored by Liam Kelley-St. Clair, Principal Consultant, and Naomi Hoffman, Consultant II at Anthesis North America.