Big investors oppose mandatory social indicators under SFDR

State Street, PGIM and T Rowe Price join pushback against proposed reforms to regulation.

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Some of the world’s largest investors have opposed the introduction of mandatory social indicators under the SFDR in their responses to a recent consultation on reforms and additions to the regulation.

In the responses, published on Tuesday by ESMA, a series of managers including PGIM, State Street and Insight Investment opposed the introduction of a series of mandatory disclosures on social factors under SFDR due to concerns over the broader state of the regulation.

European and global industry associations had already raised a number of concerns over the proposed reforms, which include simplification of reporting templates, new mandatory and voluntary social indicators, and a Do No Significant Harm “safe harbour” to avoid conflicts between differing applications of the principle between SFDR and the EU taxonomy.

In its response, PGIM said there had already been a number of challenges for reporting on existing indicators, and time should be taken to review those indicators before expanding them.

This was echoed by State Street, which warned that substantive changes should not be made to the regulatory standards until clarifications had been provided on the legal framework itself.

The UK’s Insight Investment said it was not opposed to the introduction of social indicators in principle but argued that the timing was wrong. Existing data gaps need to be resolved, and the European Commission should conclude its review of the regulation before new components are introduced, the manager said.

It also warned that proposed indicators could be seen as “overly punitive” for emerging markets investments and that a one-size-fits all approach to labour markets for work-related indicators could prove difficult.

Insight Investment also took issue with proposals for a “safe harbour” for investors over DNSH, which would act as a short-term solution to differing standards under SFDR and the taxonomy.

While agreeing with the regulators’ assessment of the DNSH regime, the manager said significant changes should not be made at this point. “Firms have already implemented their policies and, in light of the expected level 1 review, we do not believe this is the right time to be reviewing this regime.”

In its response, Federated Hermes said language in the proposed PAIs included too many value judgements, noting that definitions were not given for “excessive” use of temporary contract employees and “adequate” wages.

The investors almost universally raised concerns over non-mandatory reporting for some indicators under the EU Sustainability Reporting Standards (ESRS). The European Commission’s draft rules have introduced a materiality assessment for some reporting indicators, which impacts the reporting ability of financial institutions on PAI indicators.

State Street warned that data coverage is “extremely low” for the proposed indicators, and noted that while the EU’s Corporate Sustainability Reporting Directive (CSRD) may help close some data gaps for investors, there will still be limitations.

“Should the ESAs move forward with this proposal, at a minimum, financial market participants should be given the option to disclose under SFDR’s ‘opt-in’ mechanism,” the US giant said.

State Street also blasted the implementation of SFDR, warning that the “disorderly evolution of SFDR has already diminished investor trust in sustainable products associated with the SFDR regime”.

It noted that pre-contractual documents have been updated in some cases more than four times to be compliant since March 2021, which it said was “unduly burdensome” for market participants and national authorities who approve funds.

Allianz Global Investors agreed that mandatory PAI indicators should also be mandatory under the ESRS.

The firm also flagged issues with ESG data. “In the present situation, firms are extremely dependent on a limited number of data providers, we are concerned about the high concentration of market power with these data vendors,” it said.

Regulators could make a significant improvement by providing data infrastructure for firms to upload and verify data, the manager added, arguing that a public database would lead to improved transparency and comparability as well as easing the reporting burden.

Substantial changes to the status quo could result in “huge resource and cost impacts” as well as potentially reducing trust in sustainable products, Allianz GI continued.

T Rowe Price did not comment on the proposed social PAIs, but said it envisioned some difficulties with a proposal to introduce disclosure requirements for quantitative thresholds used to take into account PAI indicators for the purposes of calculating ‘Do No Significant Harm’.

Not all indicators are suitable for single quantitative thresholds, it said, and some thresholds and methodologies may be part of a proprietary research process.