ESG Blog: Distribution Oversight challenges with respect to sustainability – Grainne Dooley

Last week I participated on a distribution panel at the Informa UCITS and AIFM conference in Dublin. We discussed assorted items including the implementation of the Sustainable Finance Disclosure Regulations for Article 6, 8 and 9 funds.

The commercial case for sustainable funds is already well understood. Both institutional and retail clients want to align their portfolios with their personal values. Asset managers recognise this and are increasing their investment product range to satisfy investor demand.

In the UK last year, sustainable fund inflows surpassed the broader market (£37bn of inflows vs a broader market net flow of £27bn). European flows showed a similar pattern. Figures from Morningstar show 64% of all European inflows in Q4 2021 were into Article 8 and 9 funds.

The channel that ensures the investment product the asset manager is creating gets to the end investor is via a distribution channel. This channel is often complex with many sub-advisors involved, creating a distance between the end investor and the asset manager. As with most things in life, the greater the distance between two end points, the greater the risk of miscommunication or mis selling.

This is particularly relevant with respect to the Sustainable Finance Disclosure Regulations, where its incomplete status means, in effect we have a labelling regime but with little detail as to what these categories mean, in particular in relation to Article 8.

Moreover, while Europe wants to create a harmonised distribution platform (through the Cross Border Distribution Regulations) that allows the seamless selling of investment products across all jurisdictions, the reality is there often a different interpretation of European rules in different countries which hampers the ability to sell funds seamlessly and creates more costs for the asset manager.

Against this backdrop, distribution oversight is now a regulatory focus. While there has always been an element of distribution governance within asset managers, the structure has meant this happens at arm’s length. The development of distribution oversight necessitates more interaction with the asset manager – this is a good thing. It should lead to more alignment between the product and distribution strategy which means the end investor gets the product they want.

It is still early days with the new sustainability regulations. Given the lack of clarity around what constitutes a sustainable fund (should it be principles based versus rules based?), there is much confusion for the end investor as marketing documents allude to the lack of common definitions and labels regarding sustainability.

What we do know is, consumers (the end investor) are actively engaged in this discussion and want to direct their money towards sustainable goals in parallel with MiFID requiring sustainability preferences to be incorporated in investment decisions. It represents a real opportunity for the investment industry to actively engage with regulators as regulation is being implemented to ensure the end investor gets the product they want.