Member Update

An ESG Update

Having implemented the first phase of the Sustainable Finance Disclosure Regulation [SFDR] in March – a set of provisions which requires asset managers to publish detailed information about how ESG (environment, social, governance) criteria are incorporated into their decision-making processes –  the EU has since confirmed that the second phase of the regulation will be delayed by a further six months until July 2022. The Phase 2 requirements relate to rules surrounding content, methodologies and presentation of the sustainability disclosures which managers must now provide to their EU investors.

This comes as the European Commission [EC] seemingly conceded a delay was necessary to ensure the seamless implementation of the rules. It noted in a letter that the length and technical detail of the RTS [Regulatory Technical Standards]; late submissions to the EC and the likelihood of further amendments had also contributed to the postponement. The decision to push back the rules, however, has been welcomed across the industry. With the EU’s Taxonomy Rules also coming into force in January 2022, many argued that introducing the Level 2 SFDR measures simultaneously – as was originally planned – risked creating too much work for asset managers.

Some lawyers argued that the delay will give fund managers more time to prepare their SFDR templates resulting in better and more transparent disclosures. In an article, Pinsent Masons said the delayed introduction of the Level 2 measures was in part an acknowledgement of the rushed and piecemeal implementation of the Level 1 SFDR requirements, which obliged managers to implement the rules even though the Level 2 provisions were not in place.

The UK takes its own position on ESG

However, the UK has chosen not to onshore the SFDR’s provisions and is instead pursuing its own ESG regime. Under proposals recently published by the Financial Conduct Authority (FCA), UK asset managers will be required to align their climate-related disclosure procedures with the recommendations outlined by the Financial Stability Board’s (FSB) Task Force on Climate-Related Financial Disclosures (TCFD). The rules will apply to all managers with more than £5 billion in AUM (assets under management) from January 2023, with the first reports expected to be submitted by June 2024.

An ESG maze

The multitude of different ESG regulations being introduced is creating problems for asset managers. It is not just the UK and EU who are adopting their own ESG regulations, but so too are a number of markets in Asia (i.e. Hong Kong, Singapore) and potentially even the US under its new administration. With this patchwork approach to ESG rulemaking, asset managers could find themselves being forced to comply with a wide variety of competing or even contradictory regulations. These risks adding to their compliance costs at a time when margins are under enormous pressure. If ESG is to truly thrive, then regulators need to adopt a more uniform and standardised approach towards its implementation.