SPOT inspection campaign by the AMF: 3 priorities to improve sustainability commitment compliance by asset management companies

To raise the investment needed to meet the challenges of the Paris Agreement, the European Union adopted its “Sustainable Finance Action Plan” in 2018. Its major objective is to associate the financial sector with the European Union’s climate objectives by promoting transparency and the orientation of financial flows towards sustainable investments.

This text represents a major challenge for asset managers, who are sometimes overwhelmed by the growing appeal of sustainable products to investors and the acceleration of regulatory obligations linked to sustainable finance. 

The SFDR regulation introduced a standard definition of several ESG-related concepts, including the principle of double materiality.  

• Market players are now required to disclose their management of two types of ESG risk: sustainability risk and adverse sustainability impacts. 

• Asset managers must also classify the financial products they market according to 3 categories (Article 6, Article 8 and Article 9) corresponding to their level of ambition in terms of taking extra-financial risks and sustainable investment into consideration. 

The SFDR requirements are being phased in over a 3-year period, with most of their provisions coming into force in March 2021.  

With the adoption of the regulatory technical standards in April 2022 and their entry into force on 1st January 2023, the affected players are now familiar with the templates and methodologies to be used to comply with the remaining obligations and produce the principal adverse impact (PAI) reports. 

30th June 2023 marked the deadline by which entities taking into account the principal adverse impacts had to publish their first PAI activity report covering the year 2022. Managers of funds classified as Article 8 or Article 9 also published their first periodic reports this half-year, according to the templates and methodologies provided by the regulatory texts. 

The European supervisory authorities have yet to publish a report examining the initial results of SFDR publications relating to the year 2022. While we await their analysis, the document Synthèse des contrôles SPOT relative au respect des engagements extra-financiers contractuels des sociétés de gestion de portefeuille, published by the AMF in mid-June is a good starting point to spot best practices and areas for improvement identified by the regulator. 

Over the course of 2022, the AMF commissioned a study and an audit campaign on compliance with contractual extra-financial commitments by funds managed by portfolio management companies. In practice, the AMF has reviewed the mechanisms used to define, manage and monitor these commitments, assessed the extent to which these practices comply with regulatory requirements, and identified good and bad practices in this area. 

Following an analysis of more than 700 asset management companies, the AMF began by highlighting the great homogeneity of ESG systems. The most common model is the definition of an investment universe reduced by several exclusions and the use of a proprietary ESG rating system fed by extra-financial data provided by several external suppliers.  

• Implementation of a transparent quality control process for non-financial data.

The AMF also notes that the process for selecting and monitoring suppliers of extra-financial data remains opaque. The regulator also recommends the implementation of a quality control process for extra-financial data, to resolve upstream the problems caused by sometimes contradictory data. A good practice in the progressive construction of the investment universe is the validation of the initial universe proposal by an independent management team.

With this in mind, the AMF encourages portfolio management companies to set up an ‘a posteriori’ check to verify the consistency of the initial investment universes with the funds’ investment policy. The aim is to ensure that there is no ESG bias due to sector, geographic or capitalization inconsistencies. 

When and how often is this audit carried out? Throughout the investment period. The AMF mentions one portfolio management company that performs a quarterly check, but in practice, this may be done monthly. 

• Improving the presentation of non-financial commitments.

The AMF analysed the construction, validation and distribution procedures of funds’ regulatory documentation, integrating the specificities linked to the presentation of extra-financial commitments. The report highlights the inadequacy of these procedures, finding that the commitments are not presented in a complete, intelligible and balanced way in most communication materials. The regulator also recommends mentioning the external suppliers of the ESG data used. 

• Flexible human and technical resources to ensure compliance with commitments.

Generally speaking, the conclusions of the regulator’s work underline the fact that the majority of ESG fund managers have considerable human and technical resources at their disposal to ensure compliance with their funds’ extra-financial commitments. However, the AMF questions the flexibility of internal ESG control systems and therefore the ability of management companies to adapt these systems to changes in their commitments to a more ambitious ESG strategy and to the rapid pace of regulatory change.

At Positivéco, we see new national and international CSR regulations as vectors for positive growth.

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