A Sustainable Future: Alain Deckers, European Commission DG-FISMA, on Regulating the Transition to a Sustainable Economy

Listen to Jason Mitchell discuss with Alain Deckers, European Commission DG-FISMA, how the European Commission is regulating the transition to a sustainable economy.

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How does sustainable finance regulation represent a sea change for investors? Listen to Jason Mitchell talk to Alain Deckers, European Commission Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), about greenwashing, enforcement, materiality, regulatory harmonisation and how the European Commission’s Sustainable Finance Strategy is bringing transparency to the ESG space.

Recording date: 30 March 2022

Alain Deckers

Alain Deckers is the newly-appointed Head of the Asset Management Unit within the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union or DG-FISMA. He was the Vice-Chairman of the EFRAG European Lab Steering Group. With over 20 years of experience at the European Commission, Alain has been responsible for policy reviews and policy development in areas including trade in goods, environmental policy, public procurement and financial services regulation.

* The views set out in this podcast are those of Alain and not the official position of the European Commission, nor the views of individual Commissioners or other officials of the European Commission.

 

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Welcome to the podcast, Alain Deckers. It's great to have you here today, and thank you so much for taking the time.

Alain Deckers:

Thank you very much, Jason. It's great to be with you, and thank you for the invitation.

Jason Mitchell:

Great. I'm looking forward to this. Alain, we have a lot to talk about, but I'd like to begin understanding your new role as head of DG FISMA's asset management unit. That's a big position, that comes at a really unique time, with so much sustainable finance legislation being developed.

Jason Mitchell:

Can you talk about what the scope and oversight of that role is? How has it evolved in the context of the EU's sustainable finance strategy?

Alain Deckers:

Certainly. Well, of course, traditionally the job has been very much focused on investor protection. It still remains focused, to a large extent, on investor protection.

Alain Deckers:

Part of the job is administering the basic legislative and regulatory framework for the asset management industry in Europe. That would involve usage directive and the Alternative Investment Fund Managers Directive, which are really the core of legal framework for asset management.

Alain Deckers:

There are many other aspects, including aspects related to disclosures, the so-called PRIIPS regulation, which is also a pretty cross-cutting piece of legislation.

Alain Deckers:

But as you suggested, clearly, sustainability has acquired a great deal of importance in recent years.

Alain Deckers:

I always joke that when I joined this department many years ago, if we mentioned climate change or sustainability, it was almost by mistake.

Alain Deckers:

Nowadays, sustainable finance and the impact that has, not just on the asset management industry, but on the financial sector and financial industry more generally, is really a core pillar of our work.

Alain Deckers:

I would say that I would spend anywhere up to 40 or 50% of my time, working on that aspect. So, clearly it has become a very important element of my work and of my new role. As it was to a large extent, in my previous role, where I was dealing with in particular, the Corporate Sustainability Reporting Directive, for the last couple of years. That clearly is a very big part of the job.

Alain Deckers:

That just reflects, I think, the increasing importance of sustainability or ESG or however we want to call it, for the financial sector and the asset management industry in particular.

Alain Deckers:

Just before I go on, Jason, I do want to very quickly introduce the standard disclaimer, of course. That anything I say is just my personal opinions. It doesn't represent the official position of the European Commission or of any individual commissioners or other commission officials.

Jason Mitchell:

Got it. No, understand that disclaimer. I appreciate that.

Jason Mitchell:

Let's dive into one of the points that you made around disclosure. I've seen data that indicates that the Sustainable Finance Disclosure Regulation, SFDR let's call it, has been a material or meaningful driver in the increase of sustainable assets held by EU domicile funds.

Jason Mitchell:

European sustainable assets, according to that data, have increased from roughly $1 trillion US from Q1 of 2021, to almost three and a half trillion by the end of last year.

Jason Mitchell:

The number of sustainability funds essentially doubled, from a little bit less than 3,500 to more than 6,200.

Jason Mitchell:

So I guess my question to you, to start off with is, do you see this growth as evidence of the success of SFDR's effort to steer capital flows? Or does it represent something else, potentially even greenwashing?

Alain Deckers:

I would like to think that it represents a real shift of investment from non-sustainable to sustainable assets. To some extent, I'm sure it is.

Alain Deckers:

Unfortunately, I suspect that it's a bit of both of the phenomena that you mentioned. One of my big concerns is that, in a number of cases, funds are essentially being rebadged. Not because the nature of the assets underlying those funds are necessarily more sustainable, but because it's just a commercial imperative to become more visible and more active in the sustainability space.

Alain Deckers:

To what extent is that phenomenon happening? You refer to it as greenwashing. That is indeed a concern, that is widely shared. Not just by me personally, but if you look at the recent pronouncements coming from the supervisory community, it clearly is also a concern for them.

Alain Deckers:

To what extent is that driving the changing allocation, or at least description of assets as being sustainable, that's debatable. But my fear is indeed, that it is certainly part of the story, and it is something that we need to be very mindful of.

Alain Deckers:

Again, I insist that I speak in a personal capacity. My big concern is that, the next misselling scandal is in the sustainability space. That if that were to happen, that could really seriously undermine the credibility and consumer confidence in this area, investor confidence in this area. So, it is something that we must absolutely avoid.

Jason Mitchell:

Hmm. It's an absolute important consideration. If it is potentially a greenwashing problem, does bad behavior explain it, or is it potentially a good faith misinterpretation on a principles-based level one basis?

Alain Deckers:

Yeah. Again, I think it's always dangerous to assume that there is a single answer or a single driver for these kind of behaviors.

Alain Deckers:

I would not claim necessarily, that our legal framework is perfect and that it could not be clarified.

Alain Deckers:

Perhaps we can at a later point, turn towards the further work that we are doing in particular, in relation to the Sustainable Finance Disclosure Regulation, for which we intend to adopt very, very soon, the detailed requirements and disclosure requirements through the regulatory technical standards under the SFDR. Which will hopefully provide more clarity.

Alain Deckers:

But again, I would not be presumptuous as the claim that our legal framework is perfect. Clearly, it probably can be clarified and improved in a number of ways.

Alain Deckers:

Having said that, I referred earlier to what I see as a commercial imperative in the industry, to reposition itself in a number of cases, to show that the industry has sustainable products to offer to the market, because the demand is there.

Alain Deckers:

I suspect, that at some stage in the not too distant future, it will be very difficult or increasingly difficult at least, to sell any product that is not in one way or another, considered to be sustainable.

Alain Deckers:

So, there is that commercial imperative. I would not be surprised, that in some cases, that leads to rather liberal interpretations of what can be labeled as sustainable, perhaps in some cases, regardless of what the legislation actually says.

Alain Deckers:

As I said, I think it's dangerous, I think always, to assume that there's a single answer, but I'm sure both are part of the story.

Jason Mitchell:

Yeah. I do want to stay on this point a little bit. It is quite interesting. I've seen your comments on social media, essentially admonishing people for claiming to be registered or badged, as you said, as Article 6, Article 8 or Article 9.

Alain Deckers:

Yeah.

Jason Mitchell:

As you said, "The SFDR isn't a product labeling scheme. Claiming or suggesting that is 100% misleading."

Jason Mitchell:

So has the asset management industry fundamentally misinterpreted disclosure regulation as an ESG badge?

Jason Mitchell:

I mean, frankly, I've heard you mention the commercial imperative. I've heard of instances for where fund distributors have essentially threatened divestment, unless the fund is labeled Article 8 or Article 8, which puts asset managers in sort of a difficult position.

Alain Deckers:

Indeed. The concern I have about the way that SFDR is sometimes used by the industry is that, as you mentioned, that it is being presented as a defacto product labeling scheme.

Alain Deckers:

Now, I understand that the funds industry needs a tool that is easy to understand, that it can use to communicate with investors. Also, there is this strong temptation to use SFDR and the Article 8, Article 9 classification for that purpose.

Alain Deckers:

But when I say that it is not a product labeling scheme, what I mean is that, there is no mechanism within the SFDR to ex-ante verify that a product is actually Article 8, pursues environmental or sustainability characteristics, or Article 9, pursues sustainable investment.

Alain Deckers:

It is simply a framework that requires financial marketing participants and others, to make certain disclosures, if they claim that products they are offering either pursue sustainability characteristics, Article 8, or pursue sustainable investment, Article 9.

Alain Deckers:

But that is all it is. It's a claim by the product manufacturer or product distributor.

Alain Deckers:

Now, of course, through the disclosure framework that SFDR establishes... Hopefully that will become even more potent, once we have the RTS on the statute book, and that becomes applicable on the 1st of January of next year. There will, of course, be a mechanism for supervisors to verify whether the claims or the disclosures that are made by financial market participants and others, actually correspond to the claims that they make about the nature of the products they market.

Alain Deckers:

But that is a... I was going to use the term second door effect. It's perhaps not the right term, but it is an ex-post, at least, process. So that's why I insist always, that SFDR is not a product labeling scheme.

Alain Deckers:

There are many labels and standards out there. Many countries in Europe have developed such labels and standards. That is perhaps something that we may need to look at, at some stage in the future too.

Alain Deckers:

But that's why, again, I always insist that SFDR is not a product labeling scheme, because it wasn't intended to be and it shouldn't be treated as such.

Alain Deckers:

Now, is it deliberate misinterpretation, as you asked? I don't want to judge people on their intentions. All I see is the way that sometimes the communication about SFDR Article 8 and Article 9 is carried out, in my opinion, raises some concerns.

Alain Deckers:

I've recently even seen that now, I think on the... You can go into a Bloomberg terminal and actually search for funds, on the basis of Article 8 and Article 9 and things like that. Those are the kind of worrying developments that I see, because again, that is not the intended purpose of SFDR.

Jason Mitchell:

Hmm. What is the solution to this labeling problem, given that there will always likely be some, I've got to think temptation, to apply this as a batch? In other words, do we need a separate piece of ESG labeling legislation from the European Commission? Is the European Commission's current work on minimum sustainability criteria, at least for Article 8 funds, essentially a response to this issue?

Alain Deckers:

It's a very good question. I want to make clear, I understand the need on the part of the industry, to have a tool that they can use, a practical tool that is easy to apply, that serves the communication needs of the industry, towards investors. So, I have nothing against that.

Alain Deckers:

All I'm saying is that, SFDR was designed for a particular purpose. That purpose shouldn't be abused.

Alain Deckers:

Now, as to whether we need to look at this broader area of product labeling or product standards or whatever we might may call it, as you say, we have already announced in the latest iteration of our sustainable finance strategy, that this is something that we would look at, in particular in relation to Article 8 products.

Alain Deckers:

Again, I, to a certain extent, incur in the error that I criticize others for making, by even using that term. But for the purposes of discussion, perhaps we can leave it at that.

Alain Deckers:

Do we need to look more broadly? I think it's an interesting question to ask. Again, my personal inclination would be to reply in the affirmative, that we do need to look more broadly at this question. But that is very much, again, a personal opinion.

Alain Deckers:

We will see. These are debates that will have to happen inside the house, and we'll have to see where it leads us.

Jason Mitchell:

How do you think about enforcement in the context of SFDR? Will the EU impose enforcement in penalties?

Jason Mitchell:

I know that you're somewhat limited in what you can say, coming from the European Commission, because that's not necessarily the role of the commission. But how do you see this working out?

Jason Mitchell:

My initial expectation, over the last 12 to 18 months, was that European regulators would let SFDR settle for several years, before enforcing.

Jason Mitchell:

I'm wondering. How do you think the increasing claims and certainly concerns of greenwashing, and in fact, the SEC's investigation into DWS, to what degree does that accelerate European enforcement efforts?

Alain Deckers:

Yeah. Generally, we don't like to think in Europe, that our agenda is being driven by the US. Although I'm certain that in some cases, developments in the US do, of course, indirectly impact on what happens in the EU, not just in this area.

Alain Deckers:

I'd like to underline one point, which you've already mentioned or alluded to, Jason. Which is, of course the European Commission doesn't have an enforcement role.

Alain Deckers:

So, our job is, we're more just a pure regulator. We draft legislation, which is then adopted by the council.

Alain Deckers:

We also enact regulatory standards, including the RTS, for example, under the SFDR.

Alain Deckers:

But we don't have a direct involvement in supervision or enforcement of these rules. That is a task for the national competent authorities, in each member state of the EU. And of course, they cooperate via ESMA.

Alain Deckers:

ESMA also has an important role in promoting supervisory convergence. Not just ESMA, also the other European Supervisory Authorities.

Alain Deckers:

Now, what we have in the SFDR for example, is there's an article in the regulation that says that national competent authorities must have the necessary powers to ensure that the requirements of the regulation are enforced.

Alain Deckers:

Our texts, often at European level, unfortunately, perhaps don't always go into a great amount of detail about enforcement matters. There are reasons for that, political and legal, but they are what they are. But the primary responsibility lies with the national competent authorities and as I said, with ESMA performing an important role, to ensure supervisory convergence across Europe.

Alain Deckers:

Now, one example of that is the joint supervisory statement that the European Supervisory Authorities published towards the end of February, if I remember correctly, in particular, related to the Sustainable Finance Disclosure Regulation.

Alain Deckers:

I think in reply to your point about whether we should let things bed down and then start enforcing, I've never been particularly keen on that approach, because the risk I see with that is just to let bad habits develop.

Alain Deckers:

My personal inclination has always been to say, well, no, you should pay very close attention to what happens, precisely during that bedding down period of the legislation, the early stages of application of the legislation. Because if you don't, again, bad habits can develop, which are then much harder to correct at a later stage. So, I wouldn't personally be in favor of that approach.

Alain Deckers:

I think it's very good that the ESAs have published this joint supervisory statement, that they're clearly showing that they are taking this matter seriously.

Alain Deckers:

As I said earlier, I very much hope that with the publication of the detailed disclosure requirements through the regulatory technical standards, which again, I really hope are imminent.

Alain Deckers:

Perhaps if we had done this recording 10 days later, we could already be talking about them. That will provide a much stronger basis for competent authorities to enforce the requirements.

Alain Deckers:

Because we are, at the moment, in a rather odd situation, where the so called level one, that is to say secondary legislation, is already enforced and in application, but we haven't yet enacted the detailed regulations, providing for the specific disclosures that are required.

Alain Deckers:

As I said, hopefully we will correct that very, very soon, and we will have a fully fledged legal framework in place. That can then apply from the 1st of January of 2023.

Jason Mitchell:

I guess, along the same veins of enforcement, how do you see harmonization evolving for sustainable finance regulation, on an EU basis?

Jason Mitchell:

There's a marked, marked difference in how some national regulators are interpreting SFDR and even positioning it alongside their own labels, which appear to be gold plated, relative to some the ESMA European commission application of SFDR.

Jason Mitchell:

I note France, Belgium and Germany are certainly going about these gold-plated approaches. How do you think that harmonization across Europe starts to fold in?

Alain Deckers:

Sure. My first observation would be that there is a lot of learning by doing. We were all up. Whether it's regulators, supervisors, the industry, investors even, we're all up against a pretty steep learning curve.

Alain Deckers:

I sometimes make a rather mean comment about politicians, over the last 30 years. I started working in the European Commission a few years after the Rio summit.

Alain Deckers:

What I've observed is that, for a long time after the Rio summit, essentially decisions in particular about climate change, were just being kicked into the long grass. No effective action was taken, with honorable exceptions.

Alain Deckers:

So the result is that, we're now faced with a situation in which we have to make very, very significant changes, very, very quickly.

Alain Deckers:

Clearly, that means that sometimes the result can be slightly messy. For example, we see sometimes, criticisms about the sequencing of the various measures we've adopted.

Alain Deckers:

They may or may not have merits, but it's a legitimate point to make.

Alain Deckers:

I want to underline that, there is a lot of learning by doing. So, when we talk about harmonization, we have to be a little bit cautious because yes, we do need, in Europe, where we want to develop a capital markets union, we do need common standard and common approaches, but that can happen at different levels.

Alain Deckers:

It doesn't necessarily always involve a new legislation. It can do, but it doesn't necessarily need to do that.

Alain Deckers:

I've mentioned the role of the European Supervisory Authorities, to ensure supervisor convergence in Europe. That is one important to element.

Alain Deckers:

We have, more generally in Europe, developed a so-called Lamfalussy process, where we use these fantastic terms, level one, level two, and even level three.

Alain Deckers:

So, we have different levels at which we can act. Again, that doesn't always require new legislation.

Alain Deckers:

Now, that doesn't exclude that in some cases, we may need to look at our legal framework and fine tune it and improve it. Because I don't think anybody in EU, whether it's in the commission or parliament or council would necessarily claim that we get everything perfect the right way around, but this is a process.

Alain Deckers:

It's a process that is made more complex by the strong sense of urgency that we're now facing, and these very clear deadline that we have, in particular, in relation to climate change.

Alain Deckers:

The amount of time we have to affect the necessary changes is very limited. Therefore, the gradient of the curve that we have to move along is now steeper than it would've been, had we taken action 10, 15, 20 years ago.

Alain Deckers:

The more we delay action, the steeper the gradient of the curve comes. So, that is clearly a challenge.

Alain Deckers:

Now, internationally, we have conversations and very productive conversations with counterparts across the world, whether it's the SEC or others. We try to learn from each other, try to align our approaches to the greatest extent possible.

Alain Deckers:

There are various fora that exist for that purpose, also, not just among regulators, but also among supervisors. IOSCO, G20 and the Financial Stability Board and so on.

Alain Deckers:

So, there are plenty of fora in which these discussions are taking place. Inevitably though, political imperatives in different parts of the world are slightly different. So, the pace of progress is also somewhat different.

Alain Deckers:

We in Europe, it's fair to say, have chosen to go for a rather ambitious and comprehensive approach.

Alain Deckers:

We in general, tend to look at the ESG space as a whole, rather than looking, focusing only on climate, for example.

Alain Deckers:

We have also, a pretty ambitious approach in terms of, for example, double materiality, which is not used everywhere else in the world. So, I think those jurisdictional specificities are inevitable.

Alain Deckers:

It's very difficult to imagine that we will have a fully harmonized approach at global level, in the short term. But that is certainly something that we have to strive for, or at least the greatest possible degree of alignment.

Alain Deckers:

In my previous job, for example, I was in charge of the preparation of the CSRD proposal. And while again, that reflects the specificities of Europe, full scope ESG approach, double materiality, and so on, we did take care in that proposal, to point the need for a global convergence.

Alain Deckers:

Certainly, in more practical terms, we very much from the commission side, also encouraged EFRAG to work very closely with international standard setters, including the IFRS Foundation.

Alain Deckers:

So, we're fully conscious of that. We don't want to fragment markets. We don't want to subject our companies to multiple layers of regulation, if that can be avoided.

Alain Deckers:

But I think we have to be realistic about the fact that the political context in Europe is different from, for example, the political context in the US.

Alain Deckers:

That explains some of the differences that we're seeing in those two jurisdictions. That is a political reality, and we have to live with it.

Jason Mitchell:

Yeah, absolutely. Materiality is such an interesting topic to discuss. I guess, I'm wondering, given your work on EFRAG, on CSRD... obviously we know each other from EFRAG, how do you see CSRD fitting in with, as you mentioned, IFRS, the new ISSB standard, the International Sustainability Standards Board standard? Which is effectively anchored in financial materiality or enterprise value for the firm, which is very different from the EU's approach in understanding the socio environmental impact that a company or an investment portfolio might have, looking at for instance, the principal adverse impacts.

Alain Deckers:

Yeah. I mean, I think there's sometimes a danger of these debates becoming a little bit more ideological than they need to be. I don't think there is inconsistency between these various approaches. But our approach in Europe, I would say, is just slightly broader.

Alain Deckers:

Having said that, when I think about double materiality, yes, it goes beyond the strict financial materiality dimension, because it also looks at what we call the inside out dimension of materiality. That is the impact or externalities that economic activities and companies generate.

Alain Deckers:

But I always think that, this for me, is also an integral part of a consumer or an investor protection mandate because there is increasingly, a tendency to make investment choices on the basis of impact. Impact investment is certainly something that has become more important over the years.

Alain Deckers:

How can we ensure that investors and asset owners are really getting what products claim they are getting, if there is no reliable information about the impacts that the underlying economic activities or companies have on the environment, on society more widely?

Alain Deckers:

So I don't see any contradiction between double materiality and even a pure investor protection mandate. Which is why sometimes, I'm a bit puzzled that agencies or authorities in other jurisdictions, that clearly have that investor protection mandate, don't seem to reflect this double materiality perspective.

Alain Deckers:

But turning to your point about the link between CSRD and the International Sustainability Standards Board, I mean, yes, the International Sustainability Standards Board again, has focused on a more financial materiality perspective or what they refer to as enterprise value creation, in some context.

Alain Deckers:

Now, there can be interconnections or feedback processes between these financial materiality dimension and the impact dimension, in the sense that, for example, if a company trashes the environment, it may be legal liability. That can have financial consequences, sometimes referred to as dynamic materiality.

Alain Deckers:

I had an exchange with Bob Ackles recently, on LinkedIn, about this. I do not believe that dynamic materiality fully captures what we mean by double materiality. I think double materiality is a broader concept, because not all impacts necessarily translate into financial impacts.

Alain Deckers:

I haven't yet seen a transmission mechanism, if I can a term from monetary policy, that would explain exactly how all impacts turn into financial impacts on the environment and society, translate into the impacts on financial situation of the company that has those impacts.

Alain Deckers:

Having said that, I think there are some welcome signs. I saw recently that the ISSP has included an agreement with the Global Reporting Initiative, to work together and try to align their standards, which suggests that there is an understanding that there is a need for a broader approach. And to the extent that that happens, I think that would more closely align with the approach we've used in Europe, with double materiality.

Alain Deckers:

So, that would be a positive step towards reflecting the approach that we've chosen Europe, in the work that's being done at an international level.

Alain Deckers:

Now, how does all of that pan out in practice, into the standards and so on? That is something that, first of all, I'm no longer responsible for. So, I hesitate to talk about, because my colleagues may not appreciate, if I give the impression that I'm backseat driving the work they're doing.

Alain Deckers:

But again, this is a process. I think we'll have to see exactly how all this meshes together.

Alain Deckers:

What I can say is that, from the very beginning... again, I want to insist on this, from the very beginning of the work we did on the Corporate Sustainability Reporting Directive, we were very conscious that we needed to at least set in place, the conditions to allow for convergence. We do the work we do in Europe, at an international level.

Alain Deckers:

I think that is a two way dialogue. It can't be simply that, international level dictates through individual jurisdictions. Individual jurisdictions have to be involved in that work and have to see that it meets their own needs.

Alain Deckers:

Because I mentioned earlier, each jurisdiction has its own political constraints. There is simply no way in which international standard setters can escape from those political constraints, because those political constraints are driven by democratic processes. That is the way it should be.

Jason Mitchell:

Yeah. It definitely will be interesting to watch and see, if out of these two standards, some sort of baseline is able to be achieved.

Jason Mitchell:

Let me move on. What do you think the implications and even the unintended consequences of creating disclosure frameworks... like the SFDR and even taxonomies like the EU taxonomy, does this inevitably lead to picking winners and losers? Is there a worry that this potentially creates pricing distortions in the market, now that you have to kind of wear the hat of asset management and you're a bit more markets focused?

Alain Deckers:

Well, these standards, you mentioned the taxonomy in particular, taxonomy is not about picking winners. It's about providing a dictionary, so that we all understand what we mean when we say that something is sustainable or not. So that there's actually a common basis to work on, but it doesn't mandate investment in sustainable activities, much less in unsustainable activities. So in that sense, it's not about picking winners and losers.

Alain Deckers:

But you refer to price distortions. I won't use that term, but I'll turn to the notion of relative prices. To a certain extent, if our sustainable finance policy doesn't shift relative prices, then it's not biting.

Alain Deckers:

Of course, even a disclosure requirement is intended to affect behavior by investors and others. That ultimately translates into shifts in relative prices.

Alain Deckers:

That's just the way the market works. That should not be a surprise. But I don't think the focus of our policy, certainly not the intention of the policy so far, has been about picking winners.

Alain Deckers:

I have personally not been shy to say, that if some parts of the sector don't see the light, then perhaps at some point, policymakers may have to turn towards more intrusive interventions, but that's not where we are at the moment. And again, that's not policy of the European Commission. That's just a personal reflection, on my part.

Jason Mitchell:

How do you think about this concept, that the platform on sustainable finances is introducing this concept of traffic light taxonomies? It would seem to make more flexible or at least broaden out the current taxonomy, in order to distinguish between environmentally neutral and harmful activities, particularly for use around energy transition themes.

Alain Deckers:

Yes. There's been a lot of debates about that, ever since we started to work on the taxonomy. Maybe I misremember, but I seem to remember Mark Carney, perhaps making a gag in reference to a movie series, talking about 50 shades of green.

Alain Deckers:

We have heard that some people think the approach has been too binary. So, that has led for some calls for a more graduated approach. Maybe that's something that needs to be looked at.

Alain Deckers:

But I think, given the overall circumstances and political context at the moment, I'm not going to venture into much more detail on this topic, Jason. I hope you understand why.

Alain Deckers:

Our focus, at the moment, is very much on ensuring that we complete the pieces of the puzzle that we have put on the table, at the moment, for the taxonomy. In particular, the Complimentary Delegated Act on gas and nuclear. That's the immediate agenda. So, I'll leave it at that.

Jason Mitchell:

Understand. So SFDR level two is set to go live January 2023, after some delays. Yet there still remains some fundamental questions around some FDR issues. Like, what exactly constitutes a sustainable investment? How should investors assess it, i.e., at the entity or economic activity level? Not to mention some pretty meaningful gaps in the data still.

Jason Mitchell:

How do you see us converging around answers to these big questions over the next nine months?

Alain Deckers:

Well, the first step, as I mentioned earlier, which I hope will happen very soon, is that we should adopt and publish the RTS under SFDR, which will provide a clear disclosure framework. And at least will provide much more detailed information, in order to assess how products perform, from a sustainability point of view.

Alain Deckers:

That's not the end of the story. Again, something else I mentioned before, I think there's going to be a need for a great deal of work by the supervisory community, to ensure that these requirements are properly enforced, that there is a common approach across Europe, what we call supervisory convergence across Europe.

Alain Deckers:

We may, at some point, need to provide further clarity in the legal framework, whether it's a definition of some of these terms that you mentioned. Sustainable investments, sustainability characteristics and so on, that all remains to be seen.

Alain Deckers:

We hope very much, that the different pieces of the sustainable finance puzzle complement and support each other. In particular, I can give the example of the CSRD and the SFDR.

Alain Deckers:

It perhaps can be argued to be slightly odd, that we started with SFDR at the level of the asset managers and only later on, came up with the CSRD proposal, although there're reasons for that. There are actually some arguments to support that approach.

Alain Deckers:

But with the CSRD negotiations proceeding, from what I understand, quite well, I'm quite hopeful that there can be an agreement on that. And then the standards kicking in, there will be a much better basis for providing data to financial market participants, subject to the SFDR.

Alain Deckers:

So, that's one example of how the different pieces of the sustainability puzzle can complement and support each other.

Alain Deckers:

I do, however, want to make clear that there's no strict legal dependency for the implementation of the SFDR and the availability of data under the CSRD. Because if there were, that would lead us to the conclusion that financial market participants subject to the SFDR, can only invest in securities or companies that are covered by the CSRD, which would then exclude any third country company, which clearly would not be a sensible conclusion to reach.

Alain Deckers:

So, there's no strict legal dependency. But again, we very much hope that all of the pieces of puzzle will support each other. And again, I'm sure that in the fullness of time, when we have experience and enough information about how these pieces are working in practice, that we may have to come back to evaluating.

Alain Deckers:

It's a normal part of a process, evaluating the implementation of the legislation. And at some point, maybe fine tuning the legislation. That's certainly not something that's excluded. But before we think about amending the legislation, we need to now see how it pans out.

Alain Deckers:

We've done a lot of legislation recently. We have to be careful not to overload it.

Alain Deckers:

There may be areas where we need to provide further tools to the industry. There may be areas where we may need to take further action, if we notice that there is a real risk and reality of greenwashing. There may be areas where we need to act, if we see that, for example, retail investors don't have access to simple and understandable information that they need to have. So, none of that is excluded, but let's see how these things pan out.

Jason Mitchell:

As level two is set to be implemented in January of 2023... and again, there have been, I think, two delays to it, what's your message to investors, in terms of navigating these short term timing misalignments?

Jason Mitchell:

The one I'm specifically speaking to is this six month misalignment, around MiFID II. I think there's a lot of consternation about when level two comes in and expectations around sustainability preferences among clients.

Jason Mitchell:

What message would you send, against the overall long term objectives that the commission is trying to lay out?

Alain Deckers:

Yeah. Again, we're all conscious of fact that there are lots of moving parts in this sustainable finance agenda. Sometimes, there can be slight frictions.

Alain Deckers:

The specific example you referred to, I think actually, the misalignment is less than six months. More like five months or something like that. But what we see is that, there are companies out there that have taken the effort to get ready.

Alain Deckers:

I would be very concerned if we were to take any action that is, in any way, seen as penalizing those first movers and perhaps even rewarding laggards. So, we have to be careful with that.

Alain Deckers:

There are requests to delay various pieces of the sustainable finance framework. I don't think that does a lot for the reputation or credibility of the overall framework. So, I'm very reluctant to go in that direction, personally.

Alain Deckers:

And as I said, we are a situation where we have to act very quickly in this area, because the planet and the climate demands that we act very quickly. So, these slight inconsistencies, but friction certainly can exist. And well, that's just life, I think. So, I wouldn't dramatize them either.

Alain Deckers:

As I said, the information I have, is that there are companies that have taken the trouble to make sure they are ready, that they are already providing the information necessary about their products.

Alain Deckers:

Again, with the publication of the RTS, which we hope to do very quickly, we think that should provide a clear framework and a very clear signal to the market, about the direction in which to go. So, I think there is a way out of this.

Jason Mitchell:

I want to change lanes on this last question, a little bit. I mean, climate change has largely dominated the ESG agenda for the last several years, for a lot of good reasons, but we're starting to see more attention around the S or social dimension.

Jason Mitchell:

Indeed, the European Commission recently issued its proposal for directive on corporate sustainability due diligence, to tackle human rights and environmental impacts across global value chains. Long title there.

Jason Mitchell:

It's been described by some as a watershed moment for human rights in the environment. It's fantastic to see, but I'm wondering from your view, what are the implications for the asset management industry, given this is obviously more corporate oriented? How do you see this complementing or fitting into the SFDR?

Jason Mitchell:

I would imagine that principle adverse impacts would be one of the linkages.

Alain Deckers:

Yeah. It's certainly true that climate has been in the political spotlight. We saw that with COP25 and COP26 in Paris and Glasgow. But I would slightly question the initial premise of your question, in the sense that as I mentioned earlier, in our legal framework, we have in most cases, adopted an approach which covers the full ESG spectrum.

Alain Deckers:

That's certainly the case for the CSRD proposal. It's also the case for the SFDR. Even in the taxonomy, we started with climate, but the taxonomy regulation already includes the other environmental objectives, and work on that is proceeding.

Alain Deckers:

So in the EU, from the get go, we've taken a slightly broader approach.

Alain Deckers:

Now, the due diligence proposal thing... I've slightly shortened the text of the title that you refer to, Jason, is I think, an important part of the puzzle that will further support the implementation of the EU's sustainable finance agenda.

Alain Deckers:

From the asset management perspective, I guess what's really interesting is, what information do asset managers and others get from the investee companies? That will happen.

Alain Deckers:

It's happening today, to a certain extent already, under the Non-financial Reporting Directive. And in the future, through the CSRD, in a much more detailed, comparable, granular and reliable way.

Alain Deckers:

If I remember correctly, the scope of the due diligence proposal is such that, the companies that are covered by that proposal, would also have to report under CSRD. So, that information should be there.

Alain Deckers:

Now, this due diligence proposal provides a much more granular framework for due diligence requirements. I think that can only support the quality of the information that asset managers will receive about their investee companies in the future.

Alain Deckers:

So again, I see this as another complementary element in our sustainable finance agenda. Let's see how long the negotiations about this text take. But I think it's certainly a very good thing, that this proposal, which has been in a long time in the making, has now hit the road, and that the negotiations can start on the [inaudible 00:38:59].

Jason Mitchell:

Great. Really looking forward to it. It's been fascinating to discuss how you see the EU Sustainable Finance Disclosure Regulation evolving over time, particularly around harmonization, what can be done to address greenwashing and enforcement and why it's critical to understand, as a whole, the EU's ambitions and legislative ability in architecting the sustainable finance strategy.

Jason Mitchell:

I'd really like to thank you for your time and insights. I'm Jason Mitchell, co-head of responsible investment at Man Group, here today with Alain Deckers, head of asset management within the European Commission's DG FISMA unit.

Jason Mitchell:

Many thanks for joining us on a sustainable future. I hope you'll join us on our next podcast episode. Thank you so much, Alain.

Alain Deckers:

Thank you very much, Jason. It's been a great conversation.