Common Green Fund Rules Remain Distant Dream

Investors call for greater clarity and certainty on regulatory expectations around sustainable finance disclosures.

Convergence of ESG fund rules is still some way off, according to leading regulators, disappointing the hopes of asset managers and clients for alignment that would reduce costs and complexity.

Speaking at the UK Investment Association’s (IA) Sustainability and Responsible investment Conference, regulatory experts said major jurisdictions shared common principles, but highlighted the barriers to eliminating market fragmentation.

“Harmonisation of standards is the nirvana that some of us dream about,” said Jeanne Stampe, Specialist Leader of Sustainable Finance Disclosures at the Monetary Authority of Singapore (MAS). “At the end of the day we all have some similar or common fundamental focus areas. The regulations may not be the same and they may not be directly interoperable, but I think that they are all united in terms of our focus on market transparency, market efficiency and investor protection.”

Stampe was contributing to the event’s ‘Global Perspectives: Sustainable Finance Disclosure Regulatory Strategies Across Jurisdictions’ panel, also featuring speakers from the UK’s Financial Conduct Authority (FCA), the European Commission (EC), and US Securities and Exchanges Commission (SEC).

Diverging regulatory strategies in different jurisdictions can cause adverse financial implications for firms. Fragmented rules can lead to conflicting or redundant compliance requirements, resulting in increased compliance costs, as well as being time consuming and complex to adhere to.

In a poll carried out at the IA event, 77% agreed that regulators should provide greater clarity and certainty around regulatory expectations over the next 12 months.

The experts were asked to comment on the timeframe they anticipated regulatory alignment, with representatives of the FCA and MAS predicting it would take 12 to 18 months. However, panellists from the EC and SEC were more sceptical, expected harmonisation to take more than 24 months.

“Sadly, it’s one thing is having the rules in place and another proposing them and then starting the process [of harmonisation],” said Elena Arveras, Team Leader at the EC’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA).

Integration scepticism 

As part of the SEC’s ‘Enhanced Disclosures by Certain Investment Advisors and Investment Companies about Environmental, Social and Governance Investment Practices’ rule, the commission had defined three types of ESG funds – ESG Integration, ESG-Focused, and Impact Funds – to promote consistent, comparable, and reliable information for investors on funds’ and advisers’ incorporation of ESG factors. The rule was due to be finalised sometime this month.

Last September, the SEC also enhanced its ‘Names Rule’ in an attempt to prevent misleading or deceptive investment fund names. Under the rule, registered investment companies whose names suggest a focus on a particular type of investment must invest at least 80% of the value of their assets in those investments.

Mike Khalil, Senior Counsel and member of the ESG rulemaking team at the SEC, said the reaction to the proposed three ESG fund labels had largely been positive, particularly regarding the overall goals of combatting greenwashing and improving and promoting investor understanding of ESG funds and advisory services.

“However, we’ve heard scepticism about the proposed integration category,” he noted. “Some wonder whether it’s necessary or appropriate and if including that part of the spectrum could heighten the risk of greenwashing and potentially sweep in all sorts of funds that don’t necessarily take into account ESG in a way investors might expect if there were enhanced disclosures.”

Last December, MAS launched the Singapore-Asia Taxonomy for Sustainable Finance, which utilises a traffic light system to define green, transition and ineligible activities across eight focus sectors. In 2022, MAS issued reporting and disclosure requirements for ESG funds targeted at retail investors, which came into force in January 2023.

The FCA added a ‘Sustainability Mixed Goals’ label to its Sustainability Disclosure Requirements (SDR) and Investment Labels regime last November. Firms can use SDR labels from 31 July, before being applied in full on 2 December alongside its anti-greenwashing requirements.

The FCA also recently issued guidance to support the financial industry in meeting these requirements. The FCA has also announced it will consult on whether to extending the labelling requirement to portfolio managers to simplify consumer choices.

The IA has said it intends to publish its updated SDR guidance in the coming week.

In September, the EC published a long-anticipated consultation, seeking feedback on the current requirements of SFDR. It also identified two possible strategies for transitioning to a more precise product categorisation system. One of these options would introduce a product categorisation system focused on the type of investment strategy, such as transition focus or promised contributions to certain environmental objectives.

The other strategy would build on and better develop the distinctions between Articles 8 and 9. Article 8 funds have environmental and/or social characteristics, while Article 9 have an environmental and/or social objective. Respondents to the consultation largely supported improved definitions for green funds, but were split on whether to junk existing labels.

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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