Fiduciary duties and governance post-SFDR implementation
Most funds completed their SFDR filings for the year-end deadline, and Olivier Carré a partner at PwC looked forward to what fund boards should be considering now. “There’s nothing substantially different in directors’ fiduciary duties with ESG, but it is a different dimension,” he said.
Market surveys point to about half of Luxembourg funds being classified as either article 8 or 9, which Olivier noted is substantially ahead of many analyst forecasts. “This share will probably grow, but under two conditions: that there are no major scandals with ESG funds and their underlying companies, and that distribution partners up their sales efforts now they have the products they have been asking for,” he said.
However, this is going to remain a complex, technical business, not least because regulations will continue to be worked on over the long term. “But if we get it right, and can provide solutions, this will be an important long-term development for the industry and Luxemoubrg,” he said. Each board will need sufficient knowhow. “All directors do not need to be ESG experts, but they must be able to understand the regulations and be in a position to ask the right questions,” he said.
There is a clear strategic component to this. Being a first or early mover that is out in front of the market appears to be an attractive prospect. “Yet leading early can leave you alone and that is not always a comfortable position to be in,” Olivier said. Hence the requirement to be clear about the responsibilities funds and their boards have regarding SFDR. “This is a disclosure regulation, which requires the industry to present key information to investors and external stakeholders?” he said.
Olivier noted that external stakeholder management and curating their ESG expectations has become a key part of the fund industry’s work. Making sure auditors or the CSSF are onside is one thing, but keeping NGOs and journalists onside is another challenge entirely. “Judgements will be made by people with zero technical insight but with an appetite to make judgements on their perception of impact. It doesn’t matter if this is fair or not,” he said.
Hence factors around disclosure and the ESG risk profile will be key considerations for boards. Products, ESG allocation and related risk, data quality and management, while keeping an eye on financial risk all need to be weighed.