CFA Institute study reveals ‘troubling’ views on EU ESG regulatory framework

The European Union’s current ESG regulatory framework, which includes the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation, is facing significant challenges, according to new research from the CFA Institute.

The CFA Institute Research Report on the EU ESG Regulatory Framework identifies a number of challenges that EU investors face in terms of ESG disclosure, data reliability and the complexity of ESG ratings, especially in the case of SFDR.

Members want EU regulators to continue to lead international sustainability efforts, but also want to see a focus on more tailored regulation of ESG disclosure requirements to ensure they are aligned with investor needs, the survey found.

“One of the reasons we conducted this study was to understand how EU member states perceive the current EU regulatory regime, which aims to support and encourage sustainable investment,” said Josina Kamerling, Head of EMEA Regulatory Relations at CFA Institute.

“We have seen mixed views on this. While there is a broad consensus that the EU regime is promoting an international agenda on sustainable finance, a similar proportion believe that EU efforts are misleading and that the lack of reliable ESG data does not make it worthwhile to consider ESG considerations in investment decisions,” she said.

“This is a disturbing finding and regulators should pay attention to the views of those involved in investment,” she warned.

Challenges and recommendations

The study identified the lack of reliable and verifiable data as one of the main challenges in implementing EU rules on sustainable finance.

According to the CFA Institute, the rapid implementation of the relevant EU regulations forced firms and asset managers to provide the required information despite the lack of reliable and verifiable data.

More than two-thirds of respondents said the lack of reliable ESG data is one of the biggest challenges for asset managers implementing the EU SFDR.

Furthermore, the lack of clear definitions in the SFDR has led to asset managers and companies interpreting applicable rules and standards differently, leading to varying implementation of EU legislation.

Just under a third of respondents said comparing ESG products is difficult because the required disclosures are not standardised and comparable across jurisdictions for retail investors, the survey found.

The CFA’s key recommendations to regulators include: continuing to drive the international sustainability agenda; providing clear and consistent ESG terminology across the full range of sustainable finance frameworks; and considering the significant challenge posed by uncertain ESG data and the associated costs of data collection and staff training.

Finally, the CFA Institute stressed that regulators should better explain the fund categorisation system described in the SFDR in the context of the disclosure requirements set out in Articles 8 and 9 of the Regulation, as well as address the complexity of ESG ratings and divergent methodologies used by providers.

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