Giuseppe Zaghini is Chairman of EACB working group on Financial Markets and Head of Compliance Governance at Iccrea Co-operative Banking Group. Before, he was senior policy officer for Financial Regulatory Affairs at the Italian Federation of Co-operative Credit Banks. Giuseppe started his career as a financial services auditor with Arthur Andersen (and then Deloitte), following that he further deepened his knowledge in the financial markets within Finance department at Capitalia Banking Group. From 2015 to 2019 he was member of Consultative Working Group of ESMA Corporate Finance Standing Committee. Giuseppe graduated in Business Administration in Rome and he is author of numerous publications.
On 10 March 2021, the Sustainable Finance Disclosures Regulation (SFDR) became applicable as one of the first milestones under the Commission’s Sustainable Finance Action Plan to come to life (following the EU Climate Benchmarks Regulation a year ago). This landmark regulation is the first in the EU to set sustainability disclosure requirements with the aim to integrate sustainability within the investment advice and investment decision making process, in line with the Paris Agreement and the UN’s Sustainable Development Goals (SDGs). Co-operative are also in scope as they provide investment advice to their clients and take investment decisions. How has Iccrea Banca prepared co-operative banks in Italy in terms of implementation of SFDR?
Iccrea Banca also shares the critical sense of urgency towards addressing climate change and sustaining the green transition in the EU. This has led to active engagement with other EACB members to analyse what operational and legal changes are required in order to implement the text and exchange on best practices. We have also looked at SFDR in parallel with the securities markets’ legislation landscape. Retail markets form the main exposure of co-operative banks’ lending and investment portfolios. And so, it was important for us to provide the necessary quantitative and qualitative information to support EACB’s dialogue with regulators and policy makers on the integration of ESG in legislation such as MiFID II, UCITS Directive, AIFMD, IDD and Solvency II. Engagement with co-legislators and ESMA in this way, has shown that such information is highly valuable in understanding how to best integrate sustainability risks within the principal-agent relationship of investments.
On an organisational level, as Iccrea Banca we approved in 2020 a Sustainable Plan shifting from a “reporting approach” to a “strategic management approach”. Within the Board of Directors, we have a managing director for sustainability, and we created a specific Department dedicated to sustainability. Furthermore, we have issued a Group policy on the integration of sustainability risks in the provision of investment services and we are supporting all our co-op banks to fulfil the disclosure requirements under SFD Regulation. Notably, we released common guidelines on how to design ESG model portfolios and how to consider ESG factors in the investment advice service, as well as instruction for the pre-contractual disclosure. All this considering the close interconnection with the aforementioned regulations and the ECB Guide on climate-related and environmental risks.
The road towards the application of the SFDR on 10 March has been met with many hurdles. These ranged from the postponed consultation and finalisation of the regulatory technical standards (RTS) mandated under SFDR, as well as, the linked RTS on ‘do not significantly harm’ (DNSH) under the EU Taxonomy Regulation, the lack of an EU register that provides ESG data at an issuer company level, and clarifications required on the content under Level 1. Legislators and industry have worked incredibly hard to overcome them, but we are not there yet. In your view, what are the main challenges preventing the intended impacts of SFDR to reach their full potential?
The ESAs have recognised the challenges of the industry and we appreciate their efforts to clarify, for example, the reporting of principle adverse impacts (Article 4 SFDR) on sustainability indicators at an entity level, as well as, trying to provide some context behind the difference in Article 8 and Article 9 products. However, the ESAs’ mandate is limited and thus many fundamental issues at Level 1 still remain as addressed in their letter to the Commission on 7 January 2021 (e.g. the definition of “promotion”, the treatment of discretionary portfolio management products). One of the main issues for our members remains the fact that there is no legal certainty on harmonisation of definitions, concepts and timings of the SFDR with the EU Taxonomy, the EU Ecolabel and retail markets texts (e.g. MIFID Delegated Act). The other main challenge is the ESG data issue: how to get this data for certain elements of SFDR (e.g. Article 4 sustainability indicators) and from non-listed entities pending the outcome of the NFRD reform.
We have also seen several market operators rush to declare themselves sustainable, and the risk I see is a homologation among financial intermediaries with different histories, roots, approaches, and goals. Sustainability should be a driver for a new banking paradigm and not a mere regulatory requirement. Having this in mind, as long as the RTS will not be in place, there won’t be a real level playing field and this could negatively affect client ability to make informed choices. On the other hand, we are all aware that such a complex RTS needs time to be implemented by market operators with different business models. It will also be important for the industry to receive a clearer signal from the Commission on how to go about these pending issues.
In which other areas of sustainability disclosures can co-operative banks further contribute to better transparency in sustainable finance and financing the green transition?
Co-operative banks will have to rely on product manufacturers for many elements of the SFDR. Therefore, it is crucial for us to choose proper partners who share our vision and to have in place sound product oversight and governance arrangements. Co-operative banks were born to change the banking system for the better, facilitating access to credit for those excluded from large commercial banks. Nowadays they can play a significant role in boosting green and sustainable investments.
In this regard, let me remind all that the Statute of Italian co-operative banks, similarly to other European co-operative banks, establishes that the Cooperative Credit Bank aims to promote the development of cooperation, education for savings and welfare, as well as social cohesion and responsible and sustainable growth of the territory in which it operates. Prior to any legislation on sustainable finance, as co-operative banks, we felt the responsibility to operate in a virtuous, inclusive, and fair way for our communities and thus we introduced many years ago this idea in our fundamental rules. Now the challenge we are facing is to demonstrate the compliance of our (good) practices with the EU ESG regulatory framework.