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.