Reporting and Governance

The EU has introduced a package of sustainable finance reforms that affect EU firms and those wanting to do business in the EU, but the timetable to comply with them is very tight. By Kate Binedell, Matthew Baker and Chris Ormond at Bryan Cave Leighton Paisner.

The Disclosure Regulation and Taxonomy Regulation both apply to ‘financial market participants’, including AIFMs, UCITS, ManCos and MiFID investment firms providing portfolio management advice.

We have set out in the table below some key features of the regulations, along with practical issues and action points. To help achieve smooth implementation of the new rules across their organisations and products, we would highlight three focus areas for asset managers. First, a scoping exercise, as there are greater disclosure and other obligations for those firms that have a sustainability focus as part of their business. Also, firms that are categorised as ‘large’ will have to comply earlier than others (in June 2021). Second, a strategic approach in terms of the extent that a firm incorporates ESG into its services, while ensuring that governance, policy and risk issues are taken into account. Third, integrating other sustainability requirements (as may be prescribed under AIFMD, MiFID II, UCITS Directive, Insurance Distribution Directive and Solvency II) with industry best practices as may be relevant on a sectoral level.

The timing for firms to implement these measures is very tight, particularly under the Disclosure Regulation, where the principal rules come into effect on 10 March 2021, even though the publication of the final level 2 measures has been delayed (from end December 2020 to an expected end January 2021). Although the European Supervisory Authorities (ESAs) have asked the European Commission to consider a wholesale delay of the Disclosure Regulation coming into force, echoed by various others as part of their feedback to the 23 April 2020 ESA consultation, the commission seems unlikely to agree to this. Therefore, firms would be prudent to press on with their implementation to be able to meet the 10 March 2021 deadline.

Another issue for UK firms affected is to what extent the “in-flight” legislation will apply at the end of the transitional period. Again, the prudent approach is to work on the basis that it will: it seems unlikely that the UK will want to materially diverge its rules with those of the EU, and at least be able to facilitate business continuity for cross-border fund operations. Also, the FCA’s October 2019 feedback statement states that the UK government is committed to at least matching the ambition of the EU’s sustainable finance action plan initiatives in relation to green finance, irrespective of the outcome of Brexit. 

Industry feedback to the consultation (alongside that on the Delegated Acts relating to sustainability risks and factors to be taken into account for MiFID, AIFMD and UCITS regimes) reminds us that ESG integration is a challenging and important area that will help drive scrutiny of investment products and avoid potentially problematic commercial and regulatory consequences of greenwashing and misleading product labelling. Various concerns have been raised as part of this feedback – we have picked out three:

• Diverging regulatory requirements as well as sequencing in the EU legislative packages. A preference for each piece of legislation to be aligned and harmonised timing-wise too.

• A disproportionate emphasis on sustainability risk. A reminder that it is important to assess all material risks (credit, liquidity, sustainability) equally.

• That sustainability preferences are not reflected in all investment strategies (such as operational real estate). Instead, to consider alternative tools and metrics for measuring ESG performance where necessary.

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