New ESG Regulations

 In Market Intelligence

At FSL we constantly monitor for changes that might affect our clients both in terms of taxation and other regulations.  Like the wider wealth management industry, we are keeping a close eye on the growing trend for ESG and how regulations are being imposed.

As part of the European Union’s process of legislating a sustainable investment infrastructure they are increasing the level of regulation with additions to the disclosures part of the EU Sustainable Finance Action Plan.  This plan includes the EU Sustainable Finance Disclosure Regulation (SFDR), the ESG Taxonomy and changes to the Markets in Financial Instruments Directive II (MiFID II).

In January 2021, ESG will become part of the MiFID II sustainable finance measures.  These new measures require advisers to ask clients about ESG and will compel firms to ensure that they offer ESG products as part of their proposition.  However, a recent survey of advisers by Rathbones1 showed that despite the incoming regulation and the broad belief that talking about ESG was a good thing, only 18% of advisers said ESG advice was already fully integrated into their business.  A further 28% described it as partially integrated and 54% said it was only relevant to specific clients or parts of portfolios.

One reason for this might be the proliferation of different ESG metrics.  Differing criteria can lead to confusion and ratings have increased in recent years, allowing investors to analyse opportunities in ways that were previously not possible.  The abundance of overlapping voluntary standards has produced a fragmented landscape that doesn’t allow for meaningful comparisons between investment opportunities.  This view is supported by research2 conducted earlier this year by MIT Sloan and the University of Zurich.  Their paper concluded that, among other things, “the level of disagreement [between ratings] is so severe that ratings agencies reach not just different, but opposite conclusions”.

However, the new rules aim to combat greenwashing and make product comparisons easier.  They could lead to asset managers overhauling their business models to become more responsible investors.

Furthermore, the SFDR requires asset managers to disclose strategic policy and business decisions from 10th March 2021.  The regulation imposes transparency obligations on financial entities, such as asset managers, to evidence how they have integrated ESG considerations into their decision-making processes.  They also disclose to end investors how they have integrated sustainability risks and considered adverse sustainability impacts, both at entity and portfolio level.

 

Sources:

  1. The Value of RESG: How mainstream is ESG investing within today’s adviser world?, Rathbones, July 2020. Link 1
  2. Aggregate Confusion: The Divergence of ESG Ratings, MIT Sloan School of Management, August 2019. Link 2
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