25 January 2022

As it prepares for new sustainability-focused guidelines in its industry, a leading asset manager in the Netherlands has tapped Varrlyn and 4ESG Consulting for support. Bringing together regulatory expertise, industry knowledge and an established track record, the two consultancies played a key role in the successful transition.

Asset managers are under more public pressure than ever to be transparent about sustainability. Amid concerns that investments may have negative environmental, social or governance (ESG) impacts, regulators are working to ensure that industry players meet demands.

To that end, the EU has introduced new legislation under the Sustainable Finance Disclosure Regulation (SFDR) – and its related Taxonomy regulation – to oblige asset and wealth managers to provide information on the sustainability of the funds in their prospectus.

Preparing for these major regulatory changes, however, “takes a lot more effort than you might think,” says Martin Defauwes, co-founder of Varrlyn, a specialist financial services consultancy. “Policies and procedures must be adapted, employees must be informed and trained, systems must be adapted and new ESG data providers must be contracted and connected. In other words: a huge operation.”

Businesses are facing operational upheaval to follow those demands – and Varrlyn was recently drafted in by a well-known asset management firm in the Netherlands to support its regulatory transition.

But while Varrlyn boasts technical expertise and industry experience relating to financial institutions and their best practices, the consulting firm found itself operating in an area outside its usual realm of expertise. Seeking deep expertise in the ESG and SFDR space, the firm took a decision to broaden its approach and collaborate with another consultancy: 4ESG Consulting.

What is to be done?

Defauwes recalls, “Normally, the customer brief is: ‘This is what we are going to do. Can you help us build, implement and test?’ But here the question was: ‘What exactly should be done?’ This legislation is completely new and requires very specialist knowledge. That is why we decided to look for another party that does have this knowledge in-house. 4ESG Consulting turned out to be a perfect match.”

Founded in 2020, 4ESG Consulting grew out of four partners with complementary expertise in regulatory implementation, legal expertise and sustainable investing. The boutique focuses on helping clients realise sustainable ambitions and complying with sustainability legislation.

Varrlyn and 4ESG embarked on the project – primarily exploring what exactly needed to be done. According to Defauwes, 4ESG co-founder Joost Prince “defined the contours” for the regulatory implementation – before Varrlyns’ project team built around it.

Most importantly, this saw 4ESG Consulting illustrate the far-reaching the implications of the new legislation for the entire business chain around an asset manager – something which at the outset wasn’t immediately clear to the asset managers.

“Think of marketing and communication, but also making agreements with customers about their ambitions with regard to the SFDR and Taxonomy legislation,” Prince explains. “That level of ambition must in turn be translated into the investment policy within portfolio management. So, the investment process will also change.”

For all the best laid plans of 4ESG, however, any organisational can be hamstrung by a failure to get buy-in from staff on the shop floor. With SFDR’s first deadline creeping ever closer, it was therefore clear that mobilising the many employees affected by the new legislation would be key to the project’s success.

Ensuring a degree of urgency was felt across all ranks was crucial for this – and this is where Varrlyn’s people-management expertise came into play. Defauwes notes, “We helped the asset managers and other stakeholders understand the change and its impact, and then with looking further ahead, and build towards the future demands of SFDR.”

“You can’t do that if you spend all day managing your portfolio, this requires a concerted effort. Eventually we will leave and then the employees will have to do it themselves.”

Moving goalposts

In the end, with the help of Varrlyn and 4ESG Consulting, the client managed to meet SFDR’s first deadline. While the asset manager met level 1 of the regulations, though, that was far from the end of the project. Level 2 is coming – and poses a new set of challenges; not least because its ‘technical standards’ are yet to be finalised. Initially, the level 2 deadline was for the first day of 2022 – and the continued uncertainty left many firms feeling unable to prepare.

“Although the project team is able to create a lot of clarity in the new legislation and its implications, uncertainty remains an important factor in the process,” says Defauwes. “You could compare it to driving at high-speed through dense fog.”

The EU has meanwhile pushed back the implementation deadline for level 2. Now set for January 1, 2023, asset managers have a brief reprieve when it comes to regulatory pressures. However, Defauwes argues that it would be dangerous to sit back – even if firms are able to more comfortably comply with this particular deadline.

“The SFDR is just the beginning,” he warns. “Obviously we’ve seen a plethora of new regulations over the past ten years to prevent a repeat of the 2008 financial crisis, but this sustainability legislation is even more important. This goes far beyond a financial problem: literally the entire planet is at stake. So, here too a lot of new regulations will follow, and the impact will be extensive.”

Following the success of their collaboration for this first large asset manager, Varrlyn and 4ESG Consulting now plan to join forces to help other financial institutions navigate these sweeping changes. The firms’ leaders believe that their combined expertise can add a lot of value, quickly, which is important when dealing with regulatory deadlines.

“The key of our strength is that we complement each other very well”, Prince concludes. “Varrlyn has the deep technical expertise and industry experience and we bring the specialist knowledge in sustainability and legislation and its implementation. Together we have a significant advantage here over other consultancy firms – small as well as large parties.”