An aggressive timeline
It was a busy summer for SFDR. In August 2022, the updated sustainability-related provisions under MiFID II and IDD Level 2 included target market elements, requiring sustainability preferences to be integrated with suitability assessments.
Next, the European PRIIPs Template (EPT) will need to be adjusted for the new PRIIPs rules for September/October and the EET will need to be populated with the larger bulk of fields.
Starting in October/November 2022, EPTs will be circulated with the new PRIIPs methodologies. On the EET side of the equation, we’re going to see additional data being shared to satisfy SFDR disclosure needs.
Leading up to the January 1, 2023 deadline, the Commission will issue an evaluation of SFDR by December 30. SFDR Level 2 Regulatory Technical Standards (RTS) take effect on January 1, which will require firms to produce Pre-Contractual Disclosures and Article 10 Web Summary Disclosure Summaries at the product level. On the same day, non-financial undertakings will start disclosing full KPIs on taxonomy alignment under Article 8.
Firms will need to ensure that periodic disclosures will be ready by their first financial year-end in 2023, on the same day. Corporate-level disclosures are already in effect but will need to switch on monitoring capabilities for 2023 to generate next year’s disclosures.
Getting EETs off the ground
The EET “light,” which went into initial production in June, was to some degree an extension of the European MiFID Template (EMT), which should provide a fairly simple transition, either internally or with the existing manufacturers in the first release. The difficulty, however, comes when you need to fill in the full EET, which will come into play from October and November this year, and heavily rely on getting the required ESG data. Questions remain regarding the best sources of the data, and what providers can cover most of the assets.
First, one must consider the taxonomy elements and set up a target of alignment. The good news is that firms can set up their own targets. The bad news is that firms will need to get their investment data analyzed to fill the EET with the actual calculations, which can be difficult to do.
There are different approaches to fund of funds emerging also. Some investors want to collect data and analyze the portfolio themselves with their ESG providers. Some asset managers are looking to build their own EETs based on underlying funds, which might be a quick win. However, issues may arise with the consistency of data. With tight EET deadlines, firms may run into delays if they rely too heavily on others to provide EET data.
In addition, most investors will need to buy Principal Adverse Impact (PAI) data for their SFDR requirements, for which EETs may be leveraged from underwriting providers as well, but perhaps only in the near term.
Three key data challenges
As with any of the SFDR regulations, the product manufacturer will always be responsible for sharing data related to the regulation with their partners, distributors, insurance record partners, and other entities. Hundreds of product manufacturers already have worked to provide their partners and distributors with the data they need to meet their MiFID II and IDD target market requirements. Still, several challenges remain.
With hundreds of new fields needed to populate the SFDR taxonomy, the first challenge is getting reliable and comprehensive data to fill those fields due to a significant gap that exists: ESG data does not tend to correlate well between providers, and some of the new taxonomy alignment fields are not even being reported. Technology, however, can help to bridge that gap.
The second challenge involves the many details, explanations and interpretations of data required, resulting in different methodologies used to make calculations.
Bridging the data gaps is the third challenge. EETs require data aggregation at the product level. Since products may be composed of many instruments, metrics also need to be aggregated. In addition, firms must be able to do EET reporting at scale across hundreds of complex financial products which can be difficult.
The general expectation is that the industry will meet SFDR regulations on a “best effort” basis in 2022 and that the availability and completeness of data will improve over time. At that point, data will likely be realigned and new data will become available. We’re also expecting to see insurance wrappers use EPT data (updated v2) from October and keep the existing v1 data in publication until December.
As EETs continue to be pushed out to the different data collection agencies and people who use EETs, many of the agencies will validate fields with FinDatEx, which will help to improve the process and clear up inconsistencies.
Other practical challenges
Interpreting some of the EET fields is one practical challenge that arises which may be addressed in a phased approach, starting with the MiFID II and IDD target market requirements in August, and continuing with the wider EET detail after that. However, that phasing in itself is causing some confusion.
Other challenges include the fact that some elements vary by country, and that some products will fall outside of the scope of the disclosures. However, the EET template still requires SFDR Article 6 products to be included, with a minimum amount of disclosure needed for all products.
Some firms had been unsure of what fields were to be populated for tranche 1 of the EET in addition to the mandatory fields. These additional fields were driven by local distributors from mainly France, Austria and Germany. We feel that an open level of communication will be needed between the EET creator and the EET consumers as we near the tranche 2 delivery in the autumn, which will require many more fields.
Optimizing ESG data collection
Firms are beginning to break through their ESG data challenges and getting to a place where they can be truly satisfied and a looming greenwashing accusation threat no longer hangs above their heads. Insurers and distributors are also making strides in how they gather manufacturers’ ESG data for use in their own SFDR reporting.
Improving ESG data coverage will be a top priority for providers. Many firms clearly have identified that one provider will not be able to provide full data coverage. Using multiple data sources will likely be required to meet specific geographical, asset type or ratings requirements. By selecting several providers, firms can acquire different types of E, S, G, PAI or other specialized data that is closest to their investment universe. In addition, the use of multiple providers helps eliminate potential bias or risk of greenwashing accusations.
To obtain the largest coverage, over both issuance and financial instruments, technology that leverages machine learning and algorithms can enable firms to obtain the data in an automated and scalable process. This frees up analysts and research departments to monitor algorithms and verify the data to enhance coverage, quality and reliability.
Historically, the front office had done much of the work around ESG and sustainability, and that will continue. Going forward, increased alignment will be needed between the front, middle and back offices to ensure consistency across different sources in terms of timing and types of data – rather than all three operating in solos and reporting different information.
Ideal solutions to help with EET
Accurate ESG analysis is based on good-quality investment data. Platforms such as Silverfinch from CSS, a Confluence company, can help investors or asset managers that have hundreds of fund inventories to collect data and look-through to their investments, which is a prerequisite to doing sound ESG analysis.
In addition, aligning the middle to back offices can be best achieved by using a multi-source platform, such as Confluence’s Revolution, that provides the analytics the front office needs as well as delivers the data the middle and back offices need for downstream reporting.
But time is of the essence and the next few months will be intense. Companies supplying EPT and EET templates will want to be in a position to distribute underlying data to users of that data well in advance of their partners own deadline. With deadlines fast approaching, it is more important than ever that asset managers ensure they are ready to meet the SFDR ESG requirements.
Disclaimer: The information contained in this communication is for informational purposes only. Confluence/StatPro is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.