There are concerns over the readiness of asset managers for the impending implementation of the Sustainable Finance Disclosure Regulation (SFDR) rules.

Risk, regulation and ESG consultancy Novatus Advisory (Novatus),  has published the findings of its research study investigating the implementation of the SFDR within Asset Managers, and found that it opens up new risks that firms maybe accused of greenwashing if they are not on top of their responsibilities.

The research sought to assess the concerns firms had regarding the implementation of the regulations, the specific challenges they faced and how these have been addressed. It found that the disconnect between understanding and implementation may lead to unintended greenwashing:

The research found that 16% of respondents said they have read the requirements but are confused by a lack of regulatory clarification in certain areas.

It added nearly 64% of asset managers who advertise Article 9 funds have at least one product with sustainable investment allocations of less than 90% or have failed to definitively disclose their planned allocation for sustainable investments for their Article 9 product(s). This is contrary to the European Commission’s repeated clarifications that Article 9 products should only make sustainable investments (with exception only for hedging and liquidity purposes).

“These results indicate that it is likely that many firms are unintentionally greenwashing,” it added.

“Many firms are yet to act on implementation, creating numerous risks externally and internally and the need for third-party support.”

It found only 21% of firms have a team mobilised and requirements fully in place for the SFDR implementation and compliance, with an additional 77% needing further actions to be put in place. Whilst it may be the case that firms are waiting for clarity on some of the rules, this puts them in potential breach of the rules already in force.

Respondents recognised the risks, with the risk of losing investor flows (32%) and reputational risk of potential greenwashing (25%) identified as the single biggest concerns externally.

This, compounded with 64% of respondents indicating the regulation had had a high or severe impact on resourcing, 35% identifying the lack of an internal resource to deliver on the SFDR, and 24% also highlighting a lack of in-house knowledge or expertise as key challenges internally, resulting in 72% needed some sort of additional third-party support.

Coralie Nelson, head of ESG Advisory explained:  “The need for external support and guidance regarding the implementation of the SFDR is clear. Our research also demonstrates that that many firms do not have the necessary expertise or headcount to deliver the changes brought about by the regulation, which significantly increases the risk of greenwashing”.

In all 80% of respondents expect to be subject to dual disclosures under the SFDR and the SDR, further increasing the compliance burden on affected firms. At the time of the survey 71% of firms were still facing remediation of the SFDR rules, whilst awaiting the release of SDR rules.

Andrew Hedley, partner and co-founder of Novatus Advisory said:  “The outcomes of our study are clear: there is a disparity between understanding the rules and practical application. Based on the findings, no firm should have complete confidence in their SFDR programmes. We believe the market-wide confusion is reflected further within firms – where senior leaders and Boards believe there is no action needed, but the evidence points to the contrary, with many companies failing to understand the full requirements of the regulation”.