Asset managers in Europe are now required to incorporate sustainability risks across their investment processes, product governance, and internal systems. However, managers still have much to do to comply with both the spirit and the detail of the EU's Sustainable Finance Disclosure Regulation (SFDR), according to the latest issue of The Cerulli Edge―Global Edition.

“It’s still unclear how soon managers will be in a position to comply with the SFDR, which took effect last month,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli Associates.

Under SFDR, European funds need to be classified by their managers into one of three categories, with the required disclosures tailored to each. Varying degrees of disclosure on environmental, social, and governance elements have to be provided to investors in all funds.

Zumbo says that asset managers face a number of challenges when categorizing products under the three categories of the regulation. For example, it is not clear what constitutes “promoting” environmental, social, or sustainable objectives. Managers should continually reassess the assignment of their products under the SFDR in the short to medium term. Assigning Article 8 status is the more straightforward of the three but deciding which products might instead be assigned to Article 9 is less obvious.

Furthermore, the absence of any formal market standards or definitive regulatory framework is making it difficult to map existing policies and processes onto those requirements. This has led asset managers to apply their own interpretations and processes. The resultant bespoke structures may not match with the more prescriptive elements of SFDR, which adds to the challenge managers face in ensuring that they have access to robust datasets that match the SFDR requirements. They need data to inform their investment processes, to provide outputs for disclosures, and to underpin their operational infrastructure.

Another complication is that many financial products that fall within the scope of SFDR will have investment in regions outside of Europe, where it might be difficult to obtain quality data. In addition, managers of funds that hold shares in other funds will need to have full knowledge of those fund portfolios to satisfy the requirements around consideration of principal adverse impacts.

Other Findings:

• Most target-date managers in the U.S. do not offer products with a guaranteed component, but a shift is underway. Some 66% of the defined contribution (DC) investment-only asset managers that Cerulli surveyed expect the passage of the SECURE Act to lead to increased annuity adoption in DC plans. Heightened market volatility may also serve as a catalyst. However, it will not be a barrier-free passage.

• In Asia, regulators have emerged as key drivers of the adoption of sustainable investing. The Monetary Authority of Singapore, for example, is looking to drive the promotion of sustainability bonds and loans and has issued a call for more sustainability-themed funds. Korea’s Green New Deal has garnered strong interest from asset managers, some of which have launched several funds linked to the initiative. In Singapore and Hong Kong, regulators are positioning their markets as regional hubs for green finance.