The Autorité des Marchés Financiers (AMF), the French financial markets authority, has highlighted shortcomings in the way the country’s five largest asset managers relate to external ratings providers for ESG products, after carrying out checks on the approach to ESG taken by these and nearly two hundred other managers.
The findings follow a set of new, stricter rules issued earlier this month by the European Commission for ESG ratings providers, in an effort to improve transparency and governance.
AMF’s starting-point was the response from 176 French asset management companies (AMCs) to a questionnaire sent to them in the second quarter of 2022, to elicit information on how they monitor compliance with ESG and socially responsible investing (SRI) commitments for funds open as at 31 March 2022.
From this sample, AMF selected five AMCs managing a diversified range of funds invested in equities, bonds and money market instruments, with ESG/SRI funds accounting for between 20% and 90% of assets under management.
It carried out a series of operational and thematic supervision of practices (SPOT) inspections of the ESG/SRI management systems of these five AMCs.
Issues which AMF was seeking to find information on included the resources used for ESG/SRI management; ESG rating methodology; the process for selecting and monitoring external suppliers of non-financial data; and the process for creating and reviewing the initial investment universe and investment process.
AMF found that while the five AMCs had put in place increasing resources to define, review and manage ESG commitments, they remain dependent on external ESG data providers. Only one of the five checks the quality of this non-financial data before incorporating it into the ESG rating algorithm.
The study also highlighted the inadequacy of permanent controls to justify corrections which are made to ESG ratings calculated by the rating algorithm (“override”). Only two of the AMCs inspected have a satisfactory process for this diligence.
Turning to the creation and review of the investment universe for ESG/SRI funds, AMF found that all five AMCs inspected used a team which was independent of the management activity. This practice is less common among the other AMCs.
However, only two of the five AMCs carry out ex post checks to ensure the investment universe is consistent with the fund’s ESG policy.
Around half of the other AMCs had also implemented this type of control.
AMF also found that four of the five AMCs inspected boasted a robust audit trail for checks carried out on compliance with commitments before and after investments.
Of those AMCs responding to the questionnaire, 77% had set up manual checks and 74%, automatic checks. But not all firms use a combination of these two types of checks.
Meanwhile, depositaries continue to play only a limited role in monitoring compliance with ESG/SRI contractual commitments, as only 30% of the 176 AMCs stated that they had discussed the subject with the depositaries of the funds they manage.
Within the five AMCs inspected, only one of the six depositaries in question is involved in ex post monitoring of some of these commitments.
AMF has reminded depositaries of their responsibilities in monitoring this compliance, and AMCs of the need to provide depositaries with the necessary data for these checks.
New biodiversity credits initiative
France and the UK have launched a roadmap to mobilise global nature finance via a new biodiversity credits initiative.
The UK-French Global Biodiversity Credits Roadmap sets out a plan for scaling up efforts to support companies buying credits which contribute to nature recovery in a credible way.
Biodiversity credits are instruments allowing investors to fund environmental projects contributing to a richer biodiversity, for example, in a rainforest or ocean. A credit would record where the environmental action has taken place, who has developed it and how it is measured and checked.
The roadmap will facilitate the sharing of best practice on the governance mechanisms for credit funding, monitoring regimes to ensure biodiversity improvements, and work towards key international milestones such as the 2024 United Nations Biodiversity Conference, where financing for biodiversity will be high on the agenda.
The UK-French Advisory Panel has also been created, to pool expert voices from around the world to form and guide diverse working groups in driving forward positive change.
Its co-chairs are Amelia Fawcett, lead director at State Street Corporation and chair of the Royal Botanic Gardens, Kew, and Sylvie Goulard, a policymaker in France’s ministry of Europe and foreign affairs, and a former deputy governor of the Banque de France.
Peter Bachmann, managing director of sustainable infrastructure, Gresham House, said: “As an early investor in companies delivering biodiversity net gain, we firmly believe in the power of private capital to support international climate and nature goals.”
He said government support was vital to this nascent market, including in the UK, which had to solve competing challenges such as halting biodiversity loss, while addressing the lack of housing developing.
“Biodiversity net gain units provide a cost-effective solution for local developers that delivers positive environmental outcomes, alongside strong financial returns,” he concluded.