The set of ESG Disclosure Regulations, which were first announced at the European Commission’s Action Plan on Sustainable Finance in 2018, will be coming into full effect throughout 2021. The regulatory framework was designed to make the EU financial markets more sustainable, with two key aspects being the EU taxonomy Regulation and the Disclosure Regulation. The set of regulations will impose environmental, social, and governance (ESG) requirements on a range of global financial services participants. This includes investment firms and fund managers in the EU, as well as non-EU fund managers that promote funds in the European Economica Area (EEA) and under the national private placement regime (NPPR).
The Taxonomy Regulation
A primary component of the sweeping regulations is the Taxonomy Regulation, which looks to address the issue of firms greenwashing their products and misleading customers and investors. The Taxonomy Regulation will establish an EU-wide taxonomy to provide firms and investors with a framework to assess and categorize environmental sustainability. The goal is to create a classification tool that standardizes ESG and sustainable economic activity assessment, to make better-informed investment decisions and company-wide changes.
The Disclosure Regulation
The Disclosure Regulation, also often referred to as the SFDR, introduces obligations on asset managers and investors to disclose how they integrate ESG factors into their risk investment processes. The Disclosure Regulation will be required as a part of their duties towards investors and beneficiaries and will come into full effect on March 10th, 2021. The Disclosure Regulation will apply to both firms and their investment products, with over 50 sustainability measures available for consideration under the disclosure, with 30 of them being mandatory. From a product level, investment sponsors will be required to review their portfolio while also considering compliance through a range of complex metrics. At the firm-wide level, the Disclosure Regulation will be broadly required, whether investment firms and managers of funds have an initial ESG focus and strategy or not.
The Disclosure Regulation requires that the entities disclose the following:
(A) Pre-contractual documents:
How sustainability risks are integrated into their investment decision and/or insurance advice;
The potential impacts of sustainable risks on the returns of financial products; and
Information on how financial products consider principal adverse impacts on sustainability factors.
Information on how they integrate sustainability risk and their remuneration policies; and
Information on their strategies to consider the negative impacts of investment decisions on sustainability.
Additionally, various pre-contractual documents (prospectuses, marketing documents, annual reports) will need to be amended to comply with the Disclosure Regulation.
As we approach 2021, more information on EU ESG Disclosure Regulation is expected to be published in regulatory technical standards (RTS). Additionally, more information can be found in the draft amendments to MiFID II, AIFMD, and UCITS regimes published by the European Commission in June this year. These draft amendments outlined the integration of sustainability into existing organizational rules and the current conduct of business rules.
As the world slows down and continues to re-assess how to operate and conduct business in a post-COVID world, the Disclosure Regulation seems more necessary and relevant than ever. With a team of ESG experts located around the globe, AMNIe aims to provide you the most comprehensive ESG integration service by aligning your corporate strategy with the most up-to-date disclosure regulations and sustainability best practices.
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