New sustainability regulations may conflict with asset managers’ fiduciary duty, EFAMA warns

EU Commission building

New EU regulations must not “force” sustainability considerations upon clients or encourage asset managers to breach their fiduciary duty, asset management industry body EFAMA has warned. 

EFAMA says that this may be the result if the European Commission (EC) decides to implement overly-prescriptive rules or makes sustainable investment products a “default option” for end-investors, when it publishes its Renewed Sustainable Finance Strategy in the third quarter of 2020.

“While we welcome initiatives to enhance the offering of sustainable financial products to retail investors, we are worried that some of the initiatives that Commission seems to suggest go in the direction of giving an excessive weight to sustainability considerations when offering investment products to clients, especially with retail clients,” says Giorgio Botta, a Regulatory Policy Advisor at EFAMA. 

The EC has been a leader in the push towards a low-carbon economy, and has encouraged the development of an environmentally-friendly financial system to support sustainable growth. In the last few years, its regulations have required firms to disclose the degree of environmental sustainability of funds and investment products that are promoted as environmentally friendly. 

EFAMA says sustainability concerns are “not the only important things to take into account when developing an investment strategy or offering investment products”, adding that managers should also consider “the time horizon for an investment, the risk profile of the investor, or in general the preferences that an investor may have. It’s important to ensure that all these factors are taken in due consideration.”

“Let’s say that there's an old lady who really only wants to pay for a year. You cannot in good heart propose to her some kind of sustainable finance product that might be more illiquid and would have a recommended holding period of a couple of years,” adds Andreas Stepnitzka, Senior Regulatory Policy Advisor at EFAMA.

The new rules must make sure, EFAMA says, they do not require managers to always consider the adverse impacts of investment decisions on sustainability, but only when this is in line with end-investors preferences. Regulations could also compromise managers’ ability to offer sufficient diversification in their offerings.

“In a regulatory environment that is not mature enough yet, this requirement could end up forcing a poorly diversified offering on retail investors. Our members may have problems in ensuring that there are enough available products that will be eligible under existing and upcoming regulation,” says Botta. 

The Sustainable Finance Disclosures Regulation (SFDR) creates two categories of products: Article 8 outlines products promoting environmental and social characteristics, and Article 9 includes products pursuing sustainability objectives. While is it clearer what Article 9 products are, the definition of Article 8 products is “much more blurred”. 

EFAMA’s understanding is that the Commission, fearing that a too broad category of Article 8 products could result in green washing, tried to fix the issue by creating a more “sustainable subcategory” of such products, through the recent changes to the draft text of MiFid II delegated acts. EFAMA said that this would be counterproductive and result in an undue complexity of already overly complicated sustainable finance rules.  

“EFAMA is very supportive of the objectives of the EU Green Deal and the Commission’s ambition to reach them. We also understand the urgency to tackle the climate change and other environmental and social challenges. However, there have been quite a lot of sustainable finance regulatory initiatives by the EU and our point is that unfortunately, these proposals have not been well sequenced. They're not even always properly aligned,” says Senior Regulatory Policy Advisor, Aleksandra Palinska. “The renewed Sustainable Finance strategy should aim to fix this and ensure that the rules are coherent and practically implementable.”