The EU’s sustainable finance plans have four key elements. First is the taxonomy that defines which activities are sustainable. Then there is the Corporate Sustainability Reporting Directive (CSRD) requires companies to report on their sustainability activities. Asset managers then use this information to report on the sustainability of their products. As per the Sustainable Finance Disclosures Regulation (SFDR). In turn, financial advisors use this information for their discussions with their clients (end-investors). These discussions establish an investor’s sustainability preferences as per the MiFID (Markets in Financial Instruments Directive) suitability test.
The flow seems perfect and should be the order in which regulations roll out. . However, currently, there are wrinkles in the flow. The Taxonomy is delayed because there is a debate on whether nuclear and natural gas are sustainable. Company reporting will not become operational before 2023. And the technical details on how asset managers report on the sustainability of their products won’t apply before 2023. While all this is sorted out, asset managers are required to show how a number of their products are aligned to the EU taxonomy, and the alignment data is not available. From August 2022, advisors will have to assess their client’s preferences based on asset managers’ reports, which are likely to be incomplete or have missing data.
While all this gets sorted out in due course, companies, investment firms, and financial advisors will need to gear up to meet the requirements. You may wonder that all this is for the EU, so why should Indian companies bother. But, many of the investment firms that do business in India also do business in the EU. So, they will have to adopt the EU norms and, by extension, will implement them in other parts of the world too. And that includes India!