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EU sustainable finance reforms provide an exciting opportunity for asset managers

EU sustainable finance reforms provide an exciting opportunity for asset managers

Mar 19, 2021
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Summary

A seismic market shift in mindset and behaviour, alongside new law and regulation, is driving an evolution of Environmental, Social and Governance practices, with ESG funds expected to more than triple in asset size by 2025 and increase their share of the European fund sector from 15 to 57% (PwC research, reported in the FT).

The EU has introduced a package of sustainable finance reforms that affect EU firms and those wanting to do business in the EU. The Disclosure Regulation and Taxonomy Regulation both apply to “financial market participants”, including AIFMs, UCITS ManCos and MiFID investment firms providing portfolio management advice.

  • Under the Disclosure Regulation firms will be required to integrate sustainability risks into their operating models, provide more detailed disclosures on ESG policies and sustainability risks and increase due diligence on the ESG profile of funds. This involves “comply or explain” decisions in relation to publishing and maintaining sustainability factors/risks for DD policies and products made available.
  • The Taxonomy Regulation establishes an EU-wide classification system or taxonomy of environmentally sustainable activities. Assessment against 6 environmental objectives eg climate change mitigation. Imposes supplemental disclosure obligations on fund managers eg a statement of whether or not a financial product has an environmental-sustainable investment objective (and if so, to what extent the criteria are met). Required updates to pre-contractual documentation and periodic reports for ESG-focused products.

The UK’s approach

  1. The FCA has extended and accelerated its plans to introduce mandatory climate-related financial disclosure requirements for listed issuers and large asset owners that are aligned to the Taskforce on Climate-related Financial Disclosures’ (TCFD) recommendations. For asset managers, along with life insurers and FCA-regulated pension providers in the UK, the FCA intends to consult in the first half of 2021 on proposed new disclosure rules. The TCFD’s Taskforce Roadmap expects 75% of asset managers to be covered by the regulatory/legislative requirements for TCFD reporting in 2022, increasing to 96% by 2023.
  2. The Government has announced its own UK taxonomy for determining which activities can be defined as environmentally sustainable, and that this will take the scientific metrics in the EU taxonomy as its basis.
  3. Although there is no March 2021 implementation date for UK firms under the Disclosure Regulation, there are various scenarios where UK firms could still legally be subject to some or all of its requirements– for instance, if they are directly caught by their EU operations; where they are marketing their funds to EU investors using the NPPRs; or where a UK firm is acting as a delegate to an EU27 AIFM that passes compliance onto it. In addition, there are also scenarios where a UK firm chooses to opt in to the EU requirements – on a voluntary basis, for competitive/ commercial advantage, in response to investor expectation or to set a baseline compliance standard across its global group.

Our view is that these ESG developments provide an exciting opportunity for asset managers across all asset classes and sectors – whose actions can unlock investment opportunities and have tangible effects on economic prosperity and the health and wellbeing of stakeholders.

 

Matthew Baker, Chris Ormond and Bernd Geier wrote about this in our Emerging Themes in Financial Regulation 2021 publication.

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Meet The Team

Matthew Baker

Co-Author, London

+44 (0) 20 3400 4902

Meet The Team

Matthew Baker

Co-Author, London

+44 (0) 20 3400 4902

Meet The Team

Matthew Baker

Co-Author, London

+44 (0) 20 3400 4902