Regulatory divergence across Europe impacts ESG ETFs
Standardisation remains a long way off
Author : Jamie Gordon
The ‘ strike while the iron is hot ’ approach of European regulators attempting to quickly build standardised ESG definitions and reporting standards has created as many loose ends as answers over the last year , with some now questioning the usefulness of ESG ETFs altogether .
The conversation about how to rank ETFs according to their sustainable credentials was front and centre last March as the EU launched phase one of the Sustainable
Finance Disclosure Regulation ( SFDR ). This framework sorted products into Article 6 , 8 or 9 – not green , ‘ light ’ green and ‘ dark ’ green – based on the compulsory disclosure by asset managers on ESG performance .
Eight months later , the Financial Conduct Authority ( FCA ) took a significant step in setting out five buckets to sort ESG funds under its Sustainability Disclosure Requirements ( SDR ).
Recognising many UK firms were subject to the EU ’ s SFDR , the regulator said funds in its ‘ not promoted as sustainable ’ category would align with SFDR Article 6 ,
‘ responsible ’ and ‘ transitioning ’ with Article 8 and ‘ aligned ’ and ‘ impact ’ with Article 9 . The FCA added it would look to implement mandatory ESG reporting aligned with the Task Force on Climate-Related Financial Disclosures ( TCFD ).
If a ‘ third country ’ trying to move in step with EU regulation seems like a boon for internationally standardised ESG reporting , then another boost came in the same month when the IFRS Foundation launched the International Sustainability Standards Board ( ISSB ) at COP26 as an attempt to build a global ESG reporting standard built on previous frameworks such as the TCFD and Sustainability Accounting Standards Board ( SASB ).
A year that burst the bubble
Unfortunately , the fanfare with which such developments are received must then be justified by regulators ironing out
24 ESG Unlocked : Europe out in Front October 2022