Europe’s ‘Ambitious Plans’ for ESG Disclosure Rules

New European rules on sustainability disclosure requirements in the financial services sector take effect in March, affecting institutions such as banks, insurance companies, pension funds, and investment firms. And while details of the Sustainable Finance Disclosure Regulation (SFDR) have not been finalized, law firm Akin Gump says the move to increase requirements shows the EU and the UK have “ambitious plans” for improving environmental, social, and governance (ESG) disclosures for financial firms.

In 2018, the European Commission established an action plan on financing sustainable growth. And “Action 7” of the plan, which takes effect March 10, calls for clarifying institutional investors’ and asset managers’ ESG disclosure duties. It sets sustainability disclosure obligations for manufacturers of financial products and financial advisers in relation to the integration of sustainability risks by participants such as asset managers, pension funds, and other institutional investors.

According to Akin Gump, the three main disclosure requirements specified by the European Commission are: 1. Disclosures related to the integration of sustainability risks in the investment decisionmaking process; 2. The pre-contractual disclosure requirements applicable when products are promoted as having an ESG focus or investment objective; and 3. The disclosures related to whether an investment manager or financial product considers the adverse impacts of investment decisions on sustainability.

The UK will also introduce new ESG disclosure requirements for Financial Conduct Authority (FCA)-authorized investment managers based on the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD). The UK’s Joint Government-Regulator TCFD Taskforce has said the UK’s proposed rules will likely include disclosure of strategy, policies, and processes.

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The taskforce also said the proposed UK disclosure requirements will interact with related international initiatives, including the SFDR. While the UK will adopt a similar regime, the rules are unlikely to be identical, said Akin Gump.

“Investment managers will need to assess the direct and indirect application of the SFDR on their operations,” lawyers for Akin Gump wrote on the JD Supra legal information site. “A first step for many investment managers is to consider the ability and willingness of the business to comply with the requirements and the extent to which compliance is possible.”

The firm said investment managers should assess their existing ESG policies and practices against the SFDR requirements to identify any gaps. It added that investment managers will need to keep in mind the potential divergent approaches taken by the EU and the UK in developing their own ESG-disclosure standards.

“The compliance exercise may require the introduction or revision of ESG policies, and extend to other policies and procedures,” said Akin Gump. “This may require the development of additional benchmarks or investment criteria, the introduction of additional data providers, or new technology in order to provide the business with the means required to implement the new policies in practice.”