There has been a 19% increase in the asset value of European sustainability funds over the last 12 months; now standing at over €5.5 trillion. Tapping into this growth is not always simple, as more stringent, yet ever moving regulations come into play.
Sustainable finance has become a central pillar of strategic planning and investment and as global efforts to combat climate change intensify, tapping into growth within this pillar means staying ahead of the regulatory curve. Sustainability frameworks are leading the charge in creating a more transparent and accountable financial ecosystem, but how are recent developments stressing the role of data in fostering a sustainable financial future?
The SFDR: A Step Towards Transparency
The European Union’s SFDR is a familiar name by now, requiring asset managers to disclose their ESG policies and how these are integrated into their investment decisions. This regulation is crucial in addressing the prevalent issue of greenwashing—where funds are misleadingly marketed as sustainable without substantial backing.
Trends and Insights
Over the past two years, SFDR has significantly impacted European real estate investment. A clear trend has emerged where brown funds, particularly Article 6 funds, face tradability challenges and redemption requests due to their lack of sustainability scope. Conversely, funds categorised under Article 8 have seen higher valuations and increased upgrades, with 435 funds moving from Article 6 to Article 8 in 2023, representing $131 billion in assets under management (AUM). This shift underscores the growing importance of ESG considerations in investment decisions.
Article 8+ funds, a subset of Article 8 with sustainable investments, have also gained traction alongside Article 8 funds (light green funds), attracting 3.2 times the cumulative flow compared to Article 8 funds without sustainable investments. Meanwhile, Article 9 funds (dark green funds), which focus exclusively on sustainable investments, have consistently attracted inflows, highlighting their strong market appeal.
To further mitigate greenwashing, the SFDR now introduces two distinct categories: transition and sustainable investments. These categories replace the previous Article 8 and Article 9 labels, offering consumers clearer insights into the purpose and impact of their investments. This shift not only enhances transparency but also encourages retrofitting and the reduction of stranded assets—investments that may lose value due to environmental risks.
Recently, there have been major concerns surrounding the issue of greenwashing and compliance in relation to SFDR. A recent study by the AMF in France found that none of the five asset managers examined were fully compliant with SFDR in terms of required disclosures, despite declaring multiple funds as both Article 8 and Article 9. This was both at entity and fund level across 25 different funds. This was found to be largely due to a lack of relevant external data and/or insufficient historical data. While the SFDR is currently in a state of flux, there are clear issues from the perspective of asset managers due to a lack of data in support of their asset classifications, which no matter the cause, need an innovative approach to solve.
For more details, you can read Utopi’s full analysis on SFDR’s impact over the past two years here.
The European Green Bond Standard
Green bonds play an important role in financing assets needed for the low-carbon transition. With the European Green Bond Standard, the EU is aiming to set a clear gold standard for green bonds. The EU Green Bond Standard (EU GBS) represents a significant stride toward standardising the green bond market within the European Union. Introduced as part of the EU’s broader strategy to achieve carbon neutrality by 2050, the EU GBS aims to enhance transparency, accountability, and credibility in the issuance of green bonds.
Key Features of the EU Green Bond Standard
- Voluntary Framework: The EU Green Bond Standard is designed as a voluntary standard, allowing issuers to opt-in if they wish to adhere to its rigorous requirements.
- Alignment with Taxonomy: A cornerstone of the EU GBS is its alignment with the EU Taxonomy for Sustainable Activities. Ensuring funds raised through green bonds are directed toward projects that meet strict environmental criteria.
- Third-Party Verification: To enhance credibility, the EU GBS mandates that issuers obtain external reviews from accredited third-party verifiers to ensure that the projects financed by green bonds genuinely align with the outlined environmental objectives.
- Robust Reporting Requirements: Issuers of EU green bonds are required to adhere to detailed reporting standards, including pre- and post-issuance reports to provide transparency regarding the allocation of proceeds and the environmental impact of the funded projects.
- Market Impact: By setting a high standard for green bond issuance, the EU GBS is expected to influence global best practices, encouraging other regions to adopt similar frameworks.
Challenges and Future Developments
Despite its benefits, the EU Green Bond Standard also presents challenges, particularly regarding compliance costs and the availability of qualifying projects. Issuers must navigate complex criteria and ensure continuous compliance with evolving standards, which may require significant resources and expertise.
With such a clear focus on a requirement for accuracy and transparency of reporting with the EU GBS, the need for centralised and accessible data is inescapable. While it only acts as a voluntary framework for now, the example the EU GBC sets is clear: be accurate, be thorough, and be ready to prove every step. Adopting the data tools needed for simpler adherence to these fundamentals sooner rather than later could be the key to success.
The Importance of Data in Sustainable Finance
Compliance with these regulations hinges on the availability of accurate and comprehensive data. Historical and real-time data are essential for maintaining compliance and preparing for increasingly stringent regulations. Early adoption of accurate sustainable data tools is crucial for the simplification of the transition to a green investment economy.
There is a tangible impact on asset value with a commitment to ESG and sustainability related objectives, correlated to a commitment to doing the correct thing when one is looking.
There has been a 19% increase in the asset value of European sustainability funds over the last 12 months; now standing at over €5.5 trillion (Maples Group).
Utopi IoT sensors, and the data they produce, can curate real-world insights to showcase ESG alignment and positive sustainable prioritisation. Giving Fund and Asset Managers access to the essential data they need to gain access to these SFDR funds and loans. In the competitive world of real estate and finance, sustainable finance and data are inextricably linked and access to real-time accurate data is no longer a choice. Utopi’s comprehensive data solutions ensure that your investments not only comply with current regulations but also align with the broader goal of achieving a sustainable future.
By embracing these regulations and leveraging robust data, we can collectively drive the green transition and create a more sustainable, transparent, and accountable financial system.
Get in touch today to find out how Utopi can support your ESG strategy, and financial regulation compliance.
Author: Ben Roberts, CGO and Co-Founder at Utopi.