Asset managers that have established ESG investments and reporting could well benefit from new EU disclosure rules, according to Moody’s.
Earlier this month the European Parliament and EU member states agreed on new rules on the disclosure and transparency requirements for sustainable investments made by asset managers.
On this, Moody’s senior credit officer Vanessa Robert highlights in a sector comment sent to IR Magazine: ‘Asset managers that have already built similar provisions into their processes and adopted ESG disclosures prior to the release of the new rules may benefit from a first-mover advantage position. These asset managers will likely attract new inflows because demand for sustainable investment strategies is growing fast and investor confidence in the transparency of the ESG market will be boosted by these new rules.’
But she points out a downside: ‘The rules will also raise operational and compliance costs, which will weigh mostly on the profits of small EU-based asset managers that are ESG laggards.’
The rules aim to eliminate ‘greenwashing’ – the practice of making misleading claims about investment products’ sustainability characteristics – and to provide investors with more clarity on ESG investments. They require asset managers in the EU to report ESG risks and opportunities as part of their fiduciary duty, and include a transparency framework so end-investors can better understand how asset managers take sustainability factors into account.
The European Commission is working with co-legislators the European Parliament and European Council to establish a unified EU classification system, or taxonomy, of sustainable economic activities, which should make ESG investing and reporting easier.
‘For asset managers that have the appropriate infrastructure, expertise and product range, the rules will likely lead to increased inflows into sustainable strategies, given increasing demand for ESG products,’ states Robert.
But she also warns: ‘The need for asset managers to update their product offering and prospectuses and explain how they include ESG factors will come with heavy one-off implementation costs. We estimate asset managers’ costs could increase by 0.25 percent to 2 percent depending on their current ESG capabilities.’
The costs will be relatively steeper for smaller players without ESG expertise, adds Robert, with asset managers that have growing ESG involvement and an innovative product suite best positioned to absorb these costs. ‘The more stringent disclosure rules will require new systems or enhancements to current systems and potential new headcount, as well as the need to train salespeople to adequately explain the considerations,’ she says.
Operating costs – excluding compensation – for independent European asset managers have already been rising, reaching 13 percent of gross revenue in June 2018 from 10 percent in 2016. ‘The new requirements will further increase asset managers’ operating and compliance costs and likely negatively pressure margins,’ notes Robert.