New EU regulations for administrators of sustainable funds, or those that invest based on financial, social, or governance (ESG) considerations, went into practice this week. These portfolio managers must also reveal specifics on how they spend. The EU's Sustainable Finance Disclosure Law, or SFDR for short, extends to all asset managers that collect funds in the EU, regardless of where they are based. As a result, the latest rules would have an effect on funds available to US investors.

Green Investment
(Photo : nattanan23 on Pixabay)
Green Investment

Greenwashing

The laws are intended to discourage "greenwashing," or the marketing of funds that are merely superficially renewable. Capital managers in the EU must identify their funds as either non-sustainable, having assets with particular environmental or social characteristics, or contributing to a specific environmental or social target, among other things.

Capital administrators would have to report how they evaluate their firms across a variety of metrics, which will necessitate revisions to disclosures and publicity materials. Beginning in 2022, comprehensive disclosures must be given.

Nuveen's global head of responsible investments, Amy O'Brien, says her organization, which controls $1.2 trillion in assets, is deeply engaged with SFDR. "It's no longer all about disclosing ESG data; it's also about how you use it to accomplish unique ESG goals," she explains. The end result is that "the end investor has more power."

The new EU regulations arrive in the wake of a flurry of ESG-related regulations in the United States.

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Expanding Examinations

The Securities and Exchange Commission has announced that it will expand its examinations of fund managers to ensure that their shareholder statements are consistent with their strategies, and will examine how ESG funds vote in shareholder proxies on environmental issues to see if they are compliant with environmentally sustainable policies. Given all the news about cryptocurrency prices, these regulations are expected to extend to alternative asset classes like digital currency due to the environmental impact of mining. 

"Verifiable, reportable actions will constantly become in demand," says David Sand, chief impact advisor at Community Capital Management, a long-time sustainability investor. "We'd want to see standardization and people needing to prove" that their portfolios are long-term.

In addition, Morningstar said that beginning next month, it would begin collecting information on funds that describe themselves as green and making it available to consumers. Since several multinational investment managers sell almost equal portfolios in the United States and Europe, US clients can check Morningstar data on the European equivalent of their fund to see how well it adheres to the ESG mandate. According to Nuveen's O'Brien, "you'll see this [the effect on US investors] as early as next month."

Raising Concerns

Plant
(Photo : Anne Nygård on Unsplash)
Plant

Investors have been concerned about greenwashing in the mutual fund sector, particularly given the rapid rise in sustainable investments. The category has seen a surge in funding. According to US SIF, the trade body for the sustainable investing sector, U.S.-domiciled sustainable investments totaled $17.1 trillion at the start of 2020, up 42 percent from two years prior. This equates to about a third of all funds under administration in the United States.

Bryan McGannon, director of strategy and services for the US SIF, says, "The European guidelines are the first effort to go after greenwashing." "It will spark a controversy in the United States."

Firms will aim to set themselves apart by making more comprehensive disclosures on how they use ESG investing. Since too many businesses in the United States still provide funds in Europe, this could increase sustainable investment efficiency in the United States, comparable to how automakers increased their emissions when California implemented tougher standards than the federal government.

Impacts on the US

According to Jon Hale, global head of sustainability analysis at Morningstar, more U.S.-based investment managers are now publishing impact reports that outline proxy voting and participation, as well as the net impact of their portfolios. He describes it as an "emerging best practice."

Aside from the SEC, the Labor Department is trying to make the climate more favorable to long-term investing. The department also stated that it would not implement two notorious Trump-era guidelines that would have slowed the introduction of renewable funds, including one that would make it more difficult to incorporate them in 401(k) accounts. Since it administers and enforces the Employee Retirement Income Security Act of 1974, or Erisa, which protects the needs of employee benefit plan members and their beneficiaries, the DOL is critical to America's retirement programs.

According to analysts, the flurry of new legislation allows fund managers to tread carefully. According to Ropes & Gray associate Josh Lichtenstein, "managers working to enforce the [EU] transparency criteria should try to make sure that any proposed disclosure on nonfinancial targets is not written in a manner that can cause problems for fiduciaries under the [Labor Dept's] approach to ESG." 

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