Asset Managers and the ESG Tsunami: Get ready for the tide of ESG disclosures

2 min read

Summary

  • The Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation serve as two of the key legislative pillars to the EU’s Action Plan on Sustainable Finance. They impose extensive disclosure obligations on financial market participants (including asset managers) and financial advisers within scope at both entity level and product level. Many asset managers will be within scope of the SFDR and non-EU firms marketing products in the EU will also have to take into account the various requirements. 
     
  • At entity level, the SFDR will require asset managers to publish: (i) information about their policies on the integration of “sustainability risks” in their investment decision-making process; (ii) the way in which sustainability risks are reflected in their remuneration policy; and (iii) where they take “principal adverse impacts” into account, a statement on their due diligence policies with respect to those impacts. 
     
  • At product level, the SFDR will also impose many disclosure requirements. These include, where the asset manager has determined that sustainability risks are relevant to the product, requirements for asset managers to publish a description of the manner in which sustainability risks are integrated in investment decisions and the result of an assessment of the likely impacts of sustainability risks on the returns of such products. Products which promote environmental and/or social characteristics or which have sustainable investments as an objective will require enhanced disclosures. 
     
  • The European supervisory authorities are consulting on draft Regulatory Technical Standards (RTS) in relation to the some of the disclosure requirements. In particular, the draft RTS sets out in detail indicators which a firm must report against when meeting their requirements relating to disclosures of “principal adverse impacts”, as well as the form and content of required website, pre-contractual, and periodic report disclosures. 
     
  • Asset managers face a number of challenges in implementing the regulations. The timeframe to implement any systems and procedures in order to be able to satisfy the disclosure requirements is short. Firms have to grapple with new concepts (such as "principal adverse impacts") introduced by the SFDR, difficulties in reporting against the prescriptive indicators proposed under the associated RTS as well as the lack of widely available, reliable and comparable data from investee companies. 
     
  • Under the SFDR, certain disclosure obligations will start applying from 10 March 2021, although indications are that application of the detailed technical standards against which firms must report will be delayed to a later date. Preparation is likely to be extensive – and may include firms taking steps to:
    • review, amend or draft their internal policy on how sustainability risks are considered in their investment processes and reflected in their remuneration policies. 
    • analyse the extent to which they consider "principal adverse impacts", whether they fall within the mandatory reporting regime or whether they will voluntarily "opt-in" and report on such impacts. 
    • identify the products which promote environmental and/or social characteristics or which have "sustainable investments" objectives. 
    • put in place systems and procedures to obtain relevant data from investee companies and to address any data gaps. 
    • consider which reporting methodologies to adopt and their approach to calculation of relevant metrics.

For the full report, please download the publication.
 

If you would like to be kept up to date on our Governance and Impact series of publications, please click here to subscribe