Gerhard Jovy, founder and CEO of acarda, the platform for compliance and regulatory reporting in the investment management industry, on the management of sustainable investment opportunities.
To what extent are sustainable investments accepted by clients of financial institutions, and what status do they have among the institutions themselves? This is a question Gerhard Jovy is often asked. He points out that according to a recent forsa study*, almost half of all Germans – 47 percent to be exact – want to consciously invest in financial assets in the future that do not harm the climate or the environment. This suggests that sustainable investments are well received by customers of financial institutions. Most financial institutions cannot avoid offering appropriately certified investment opportunities and giving them a high priority.
But just how sustainable are “sustainable” investments at present? Currently, fund companies provide ESG fact sheets on their funds in varying degrees of detail. At the moment there is no uniformity, explains Jovy. The problem is that every issuer can call its funds “ESG funds” as long as it specifies certain exclusions, for example, no investments in Australian coal mines or in producers of land mines. The introduction of the EU’s Sustainable Finance Disclosure Regulation (SFDR) – also known as the Disclosure Regulation – will change this. It is therefore advisable to adhere to the SFDR requirements now, including in the preparation of factsheets. The exclusions should be formulated comprehensively and there should be detailed reporting on the aggregated ESG data of the portfolios. The relevant data are provided by well-known providers such as MSCI, Refinitiv, ISS and sustainalytics; however, they can also be organised and standardised by acarda.
Gerhard Jovy shows that a particular challenge arises for ESG target funds (in the SFDR, these are Article 8 and Article 9 portfolios). These funds are required to report their ESG data on all investments that are made with them, i.e. unit-linked life insurance, funds of funds and other forms of investment that invest in funds. For this purpose, the EET exchange format is currently being developed by the FinDaTex working group of EFAMA. Interestingly, this format must also be provided by non-ESG funds (SFDR Article 6 funds). For this, too, acarda offers a comprehensive solution as a managed service.
For Jovy, it is clear that there will always be some volatility in the capital markets. However, ESG criteria have the potential to broaden the investment horizons of some investors towards longer-term oriented strategies. This, in turn, could cushion more severe dislocations if they occur. Long-term sustainable investments could certainly reduce the distortions on the capital market, but this is just speculation, according to Jovy, and will become apparent in the future.
Jovy assesses the current status of the regulation and standardisation of sustainable investments at the European and national level as follows: the SFDR Directive, whose Level 1 came into force on 20 April 2021 and whose Level 2 will probably not follow until 1 July 2022, is a European regulation that should be implemented quickly in all countries. However, according to Jovy, it already makes sense to take the SFDR guideline into account in ESG factsheets and to supplement the SFDR reports in the first half of 2022. This holds particularly since the interest in sustainable investment opportunities is now there.
The obligations regarding the measurement and disclosure of sustainability in relation to financial institutions are, as things stand, regulated in the SFDR, which defines two “levels”. Level 1 has already been in force since 10 March 2021 and prescribes rather general qualitative requirements at the company level. Level 2 will follow on 1 July 2022 and will go into greater detail, e.g. with regard to CO2 requirements or historical values and trends of the portfolio. Here, declarations on exclusions will no longer be sufficient.
In response to the question of how helpful and realistic the standard model favoured by the EU is for all sectors, Gerhard Jovy says that the standards on ESG criteria (called the EU Taxonomy) will help to make the widespread “greenwashing” more difficult. Instead of complaining about certain inaccuracies and unsolved problems, we should use every opportunity to offer clients the best possible sustainable portfolio selection and performances. Here, Jovy mentions examples of ESG criteria – also called Principal Adverse Impact – such as CO2 emissions, water and electricity consumption, the use of energy from sustainable sources or the proportion of women on the management board of a company.
acarda offers a holistic solution in terms of data management, reporting and marketing to meet all disclosure requirements. Firstly, the portfolio data and the available ESG data of the assets are recorded along with the portfolio and product management’s information on the investment strategy and exclusions. acarda uses these as a basis for the automated creation of the necessary reports, factsheets and website descriptions – with an application and database that can be managed by acarda clients themselves. For this purpose there is a user interface, called a dashboard or control centre, in which all processes, data flows, calculations and generated reports are set up and monitored in detail. It is precisely this holistic approach that gives product providers great advantages, Jovy emphasises. Thanks to the standardised reports, the EET data set and the classification according to Article 6, 8 or 9 of the SFDR, they can recommend to the private or institutional investor the exact funds that are required. The sooner and more precisely the fund company provides the data and reports, the better it can position itself. With a holistic approach, asset managers and insurance companies can manage their cost structures and distribution channels much more flexibly. They can adjust, manage, optimise and sell their products with little reaction time. The additional transparency makes offers more attractive and strengthens clients’ trust.
The acardaplatorm is used by fund companies, insurance companies, asset managers and private banks, and also by large fund administrators who in turn offer the ESG and SFDR service to their fund companies.
An international fund administrator commented:
“I have never experienced such a complete service with any other IT service provider. acarda/LPA offers software and services for data management, calculations and reporting as well as comprehensive regulatory know-how due to its involvement in working groups and associations. The offer includes not only ESG/SFDR, but all regulatory reports and data of the financial industry.”
* forsa research on behalf of Santander Consumer Bank „Investmentverhalten der Deutschen bei grünen Anlagen: Was zieht mehr – Rendite oder Klimaschutz?“, Germany 2020
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