Over the last year, as U.S. financial regulators have sent signal after signal that greater environmental, social and governance (ESG) and climate risk oversight is on the near horizon, the European Union has been busy actually codifying its sustainability goals. By mandating that financial advisors and managers in the EU approach climate and sustainability as a fundamental investment risk, the new ESG regulations will transform the global standard for risk management.
What is the Sustainable Finance Disclosure Regulation?
The EU’s Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March, is designed to drive capital toward sustainably-oriented investments. It is widely considered the broadest regulatory action in sustainable finance to date. And for U.S. firms trying to keep up with the blistering pace of ESG-related transformations within the financial sector, the SFDR could offer some clarity.
The SFDR was initiated by the European Commission as part of a broad EU action plan, announced in 2018, to encourage sustainable investing throughout the EU financial system and to put ESG issues on-par with traditional financial risk indicators. It is broad in its scope covering nearly all asset managers, investment product providers, and financial advisors that operate within the EU. The first phase of reporting standards is already in effect and increasingly detailed reporting obligations will phase in over the coming months and years.
What do the regulations require of EU asset managers and financial advisors?
Under the SFDR, all EU asset managers (whether or not they are focused on sustainability) are now asked to publicly disclose: their approach to incorporating sustainability considerations their investment decisions; any “adverse impacts” investments may have on environmental or social factors; and, any sustainability risks that may impact investment performance.
Starting in January, financial products marketed as having ESG characteristics or a “sustainable investment” objective will face additional reporting requirements intended to discourage greenwashing.
Financial advisors will now be required to counsel clients on the sustainability implications of their investments — including the potential impact (whether negative or positive) on the financial performance of their investments.
The SFDR will act as a mandate for participants in financial markets to “do no harm” to society and the environment while also safeguarding investors from exposure to undue risk stemming from poor ESG positioning of their investments. The regulations are written to make sustainability considerations a routine addition to existing financial disclosure and risk-management requirements.
The regulations follow a “comply or explain” approach, wherein managers and advisors who choose not to comply with the disclosure rules must instead provide a clear explanation of why sustainability considerations are not relevant. This effectively shifts the default assumption to one of material relevance, placing consideration of ESG issues squarely within standard risk-management frameworks. Under this paradigm, a lack of consideration of ESG risks (for example, the risk to a company’s profitability from the imposition of a carbon-tax or a supply chain disruption resulting from a flood event) could be considered a breach of fiduciary responsibilities.
What does this mean for ESG – and U.S. firms?
The SFDR has an impact on U.S. firms through one direct channel: Non-EU managers and advisors that market financial products into the EU or provide advice to EU firms are also covered. These are typically large players in the industry. BlackRock, for example, has made its SFDR statements public through its website. In a memo released in March, the firm reported that nearly $400 billion in assets fall under the scope of SFDR.
For most U.S. managers and advisors, the SFDR will have a more indirect effect: catalyzing a new standard for ESG risk accountability. The reputational costs of ignoring the sustainability aspects of risk-management and the potential flight of capital toward firms that are working within this new paradigm will now need to be considered.
The idea that sustainability issues could impact investment fiduciaries in the U.S. is not new. In the last decade, policy groups and academics have been proposing that investment fiduciary standards be revised (or reinterpreted) to include sustainability considerations. The argument they make is that the best long-term interests for the majority of household investors cannot be met without consideration of environmental and social well-being – a short-term focus on purely financial goals is no longer adequate.
The EU regulations will drive greater reporting of ESG risk data
One of the most transformative aspects of the SFDR may be its impact on corporate reporting. Large asset managers, already hungry for more quantitative ESG data, are now calling for disclosures that are both mandatory and consistent with international reporting frameworks.
To meet this demand, third party data providers such as MSCI, Refinitiv, Sustainalytics, Moody’s and S&P Global are now tailoring products toward the data-points needed for compliance with the SFDR.
Taken together, the regulatory and cultural trends driving corporate ESG and climate-risk disclosure will ultimately set a new normal for best-in-class risk reporting both at the corporate and portfolio level. U.S. managers and advisors who don’t start integrating these data will likely find themselves out-of-step with evolving risk-management standards.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
