Incoming EU legislation is another step in the integration of responsible investing, says Cerulli

The EU’s impending disclosure and taxonomy regulations will not replace current responsible investment frameworks, but will instead be integrated into the existing assessment and reporting regimes to ensure a best-in-class approach, according to findings from the latest issue of The Cerulli Edge—Global Edition.

Due to the array of publicly available frameworks focused on sustainable risk management and impact investment, the risk management, measurement, and reporting structures constructed by asset managers in Europe differ widely. The EU is seeking to achieve conformity and transparency via two key pieces of the regulation: the Sustainable Finance Regulation Directive (SFRD) and the EU taxonomy. Technical details are yet to be confirmed, but Cerulli, a global research and consulting firm, expects the regulation to have several wide-ranging effects, the most notable being to move impact investing more into the mainstream. The intended conformity and transparency will likely be prominent features of requests for information.

Connor Bigland, an analyst with Cerulli’s European institutional team in London, expects high-level policy statements to be replaced with quantitative measures as the main means of disclosure. “That being the case, the legislation could blur the lines between environmental, social, and governance (ESG) investment and impact investment in its current form,” says Bigland.

The regulation, which will take effect next year, will generate renewed attention on engagement capabilities. Cerulli says asset managers should develop targeted engagement policies that focus on specific issues and sectors.

The incoming legislation will likely result in the launch of new products tailored to meet the new sustainability requirements. Cerulli expects that products, such as market indices or trackers, will struggle to meet sustainability requirements.

“It is likely that light-touch ESG re-weighting strategies of many ESG indices at present will mean that related tracker funds will not meet new legislative sustainability requirements while maintaining minimum tracking error. As a result, the legislation will likely trigger the construction of new ESG indices by providers in the market,” says Bigland.