What a New European ESG Template Means for Asset Managers

The Regulatory Technical Standards (RTS) – the second phase of the Sustainable Finance Disclosure Regulation (SFDR) - came into force in the EU financial markets on 1 January 2023. Shortly after, FinDatEx released a draft new data template, the European ESG Template (EET) which aims to support the process of ESG data exchange for financial market participants and facilitate compliance with the legislation. The first version was published in January 2023, with further supplementary versions almost certain to be released in the future.

This article takes a closer look at the EET - its structure, scope, and the proposed benefits of adoption, as well as the kind of disclosures required and what this means for funds complying with SFDR requirements.

What is FinDatEX and the EET?

FinDatEx (Financial Data Exchange Templates) is a group of representatives from the European financial sector with a mission to facilitate and standardize data exchange in compliance with financial market legislation in the EU, which includes the Markets in Financial Instruments Directive 2014 (MiFID II) and the aforementioned SFDR, through the development of voluntary templates. Their first published template, European MiFID Template (EMT), concerns itself with information on product governance, such as pricing and target markets, aimed at facilitating data exchange between product manufacturers and distributors.

The EET has been developed with a similar objective in mind, this time to facilitate data exchange on ESG matters. The provision of consistent, high quality and comparable ESG data remains one of the industry’s biggest challenges in terms of ESG disclosures. With the implementation of the SFDR and more stringent reporting requirements coming into play for European financial markets, the EET is one of the tools available to make this process a bit easier.

What do fund managers need to know?

Structure

The EET consists of a primary worksheet, detailing the data fields to be disclosed, as well as three worksheets for Stewardship Codes, ESG Label-Standard List, and Commitments. Reporting on these three worksheets is conditional based on the type of responses in the main datasets. Finally, there are country-specific explanations that outline criteria specific to Germany and France that have additional regulations.

Scope

The EET is not mandatory, but it is a useful tool for enhancing compliance and disclosures between financial market participants in the banking, asset management, structured product, insurance, and pension industries. Within this broad group, the EET employs the same definition of relevant parties as the MiFID, with a distinction between manufacturers (firms that create or design investment products) and distributors (those that sell these products to clients). The EET is relevant for firms that fall under either or both of these categories and deal in products within the scope of the SFDR. Use of the template is simply a more structured approach to tightening compliance with regulations, which is not limited to the SFDR but also the EU Taxonomy.

Benefits of using the EET

Version 1.0 of the EET focuses heavily on SFDR level 1 and its Regulatory Technical Standards (RTS) disclosures. Data fields in the template reflect these regulations, covering extensive data points across the range of ESG aspects at the fund or product level. For product manufacturers, this helps to assess internally the level of sustainability of a product, and by extension, the appropriate classification of Taxonomy-aligned funds. For product distributors, the information disclosed in the EET is useful for accurately product screening and marketing a product to clients. In both instances, the chances of greenwashing are minimized by enhanced product transparency in the financial value chain.

Format and frequency of data exchange

Firms have some freedom in choosing a suitable format and frequency that best suit both the manufacturer’s and distributor’s preferences. For many, reporting on an annual basis would be the most sensible option, considering annual reporting cycles and the data collection processes that have been set up to sync with the traditional financial reporting year. However, periodic information updates are expected as different EET datasets work on different timelines. For example, newly published pre-contractual documents will require an information exchange, and upon each exchange, all EET datasets must be updated to the latest information. Acceptable formats include CSV, XML, and XLS.

Types of information covered

Some of the data points covered in the EET are:

• Breakdown of sustainable or Taxonomy-aligned assets
• Supplementary information on products classified as Article 9
• Standard ESG indicators such as emissions data and social/employee-related data
• Consideration of Principal Adverse Impacts (PAI), defined as a commitment to reducing or mitigating ESG impacts

Guidance based on regulatory requirements is contained within the EET under three categories: Mandatory, Conditional, and Optional. Mandatory data points are those required by regulation; Conditional are required only if another data point contains a certain response; Optional data points are not obligated by law but recommended.

Given that it is completely voluntary, whether or not a firm uses EET will be determined in agreement with the manufacturer or distributor of the products concerned. This discussion should entail how EET adoption can enhance disclosures towards greater compliance for all parties involved.

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