As the climate crisis garners increasingly urgent attention--and continues to define the current era--actions against it are also maturing: governments worldwide are publishing more regulations. The funds industry is, of course, no exception, but the process of achieving full regulatory control over investment practices is far from complete: “The number of regulatory consultations actually doubled last year, which suggests that the future pipeline for regulation remains very healthy,” commented Jenn-Hui Tan, chief sustainability officer of Fidelity International, at a webinar on 25 January 2024.

The pace has been fast, but for good reason. As pointed out by Helena Viñes Fiestas, chair of the EU platform on sustainable finance--speaking at the same webinar--we are living in desperate times. “In normal circumstances, the implementation of the different pieces of the EU sustainable finance package would have been done with a transition period, a logical sequencing, little by little… but we need to acknowledge that we are not under normal circumstances: We have 26 years to achieve net zero and to transform our economic model.”

“So the ambition--and the challenge--of the regulation,” she added, “simply mirrors the need for that transformational change of our economy.”

Partway there

Publishing regulations is itself an accomplishment, but it naturally precedes another step: harmonising and interrelating those regulations into a simpler format for, in this case, asset managers and other fund industry professionals.

“We’ve got the building blocks,” said Fiestas, talking about the EU sustainable finance framework. She likened the grander process of developing the regulatory system to solving a jigsaw puzzle: “It’s important to understand that each piece of the jigsaw puzzle [i.e., the elements of the framework’s taxonomy] was developed and negotiated separately. So now we need to look at how they fit together.” She drew a parallel to earlier work on taxonomy criteria for mortgages, which required updates on the energy performance directive due to varying standards and certificates across Europe.

Tan echoed the EU representative, pointing out that these building blocks of regulation have necessitated “a great volume” of policies, approaches and documentation. “And now we are in the phase of embedding and getting that right.”

Inconsistency

An inevitable growing pain of this regulatory process is inconsistency between laws and policies, particularly in larger geographical contexts. “While there is consistency in how all of this regulation fits together at the regional and country level,” said Tan, “one thing that we have observed is that it’s often inconsistent at the global level.”

“We’re seeing this across the Asia Pacific as well,” adds his colleague Gabriel Wilson-Otto, head of sustainable investing strategy, “with very different responses to the way that regulators are starting to address some of these issues.”

Inconsistency leads to certain risks, said Tan. For one thing, fund-labelling and disclosure regimes don’t always agree on how to define “sustainable,” leading to problems for cross-border fund managers like Fidelity International. Specifically, he said, this could mean “fragmentation” in their product ranges.

An easy example would be potentially problematic divergences between the standards set by the EU’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB).

Still, the harmonisation work seems to be underway. On the CSRD in particular, Tan commented that an initial phase of more divergent views and approaches has already converged into a hybrid approach, with “a set of labels that are all focused on different aspects of sustainability integration.” These, he suggests, are similar to the UK’s Sustainability Disclosure Requirements (SDR).

Is it working?

“Greenhushing” has been introduced as a knock-on symptom of environmental regulation: greenhushing is when companies actually scale back their ambition to be greener because they are too scared of reporting it wrong. At the webinar, Tan confessed to worrying “a lot” about unintended consequences of the regulatory wave, including greenhushing.

“I personally disagree,” said Fiestas, responding to the suggestion that this is a concern. She cited an example from the food industry, when the EU introduced a policy to stop companies from making health claims on their packaging. Once these claims had to be submitted and scientifically substantiated, only 5% of them were. “All the marketing, the wrapping, the promotions of food products in Europe changed massively.” Above all, she added, this helped consumers make more informed decisions. “I think that we see now in the sustainable finance market is something similar.”

She offered an alternative concern: “what we really need to be careful about is not hampering innovation.”

For his part, Tan agreed that the regulatory road is a necessary one. “Ultimately, our view is that if you want to embed sustainability into the financial system, regulation is needed to harmonise expectations and create the kind of behavioural change that we need.”