The market may evolve into developing products that write in legally binding decarbonisation commitments, which would create a direct line of accountability to the security issuer and mitigate some issues of greenwashing.
However, this is hindered by the myriad of complex and ambiguous ESG frameworks that leave too much space for interpretation.
It is likely that a wave of claims may be brought by investors, but given their position of responsibility in assessing the legitimacy of the ESG labelled product, such claims will fall flat.
FTA: Which areas do the regulators have the biggest concerns about? What issues have they already uncovered?
SC: Regulators are concerned about how sound the methodologies used by fund managers to claim a certain level of sustainability really are.
Given the lack of a standardised framework, regulators are emphasising maximum transparency.
For example, recent guidance issued by the European Commission on the definition of ‘sustainable’ under Sustainable Finance Disclosure Regulation emphasised that, as there are no minimum standards prescribed by the disclosure mechanism, assumptions and bespoke methodologies should be disclosed so that they can be scrutinised by investors and financial regulators.
This endemic standardisation risk greatly limits transparency across the market and regulators understand they have no effective way to check fund managers’ ESG claims.
By doing so, regulators are positioning themselves so that the responsibility of enforcing and policing regulations will fall on fund managers.
FTA: What should fund managers nevertheless do to shield themselves from the risk of future claims?
SC: Fund managers should make sure that methodologies used to qualify the sustainability label of a fund are as robust as possible, and based on the latest guidance from bodies such as the International Sustainability Standards Board and Science Based Targets initiative.
They should also ensure that sustainability-related terms in the naming and marketing of products are proportionate to the sustainability profile of the product.
FTA: How do you think the regulators will respond to any concerns they may have about this market over the next 12 months?
SC: In a broader context of ESG labels, the release of the ISSB methodology in June will purportedly standardise funds’ methodologies of ESG (outside the European market).
This will be a welcome development and one that regulators will be able to use to improve their oversight of the market and reduce declassifications in the future.
Regulators have made it very clear that they are not going to set standards in the ESG label market; they want to remain impartial.
It’s not their role to mandate the rate of progress of sustainable investments, and they want to appease market actors by not putting their hand on the scale of the already inevitable green transition.
