Over the next few years, several new EU regulations will be implemented with regard to Environmental, Social, and Governance (ESG) factors. Are you a fund manager? Are you ready for these regulations? Well, fear not! KEY ESG has created a comprehensive timeline of all of the upcoming regulations to help you stay on track. Download it by filling your details!
You can also read this article. We'll be providing a chronological overview of past ESG regulations, outlining the progress made by regulations implemented within the European Union to date. We'll then provide information on of all of the upcoming ESG regulations that European businesses will need to deal with in 2023 and 2024. We'll explain what each one aims to accomplish and how this legislation will impact fund managers' approaches to ESG.
The Sustainable Finance Disclosure Regulation (SFDR) seeks to improve transparency, prevent greenwashing, and endorse sustainable investment for all firms operating in EU member states.
On 10th March 2021, Level 1 of the SFDR came into effect. This involved entity-level disclosures on sustainability risks and impact. It also required fund managers to classify funds under Articles 6, 8, or 9.
We've written extensively on the different classifications in our SFDR blog series. Take a look at some of the blogs listed below for further guidance on article classification.
Part way through 2021, further SFDR guidance was enforced to ensure that large Fixed Maturity Plans (FMPs) complied with Article 4.
Article 4 increased the transparency of firms' sustainability impacts at an entity level.
Up until this point, large asset managers with more than 500 employees did not have to comply with Article 4 SFDR. However, from June 2021, investors were required to publish PAI statements on their websites and implement due diligence policies to back these statements up.
The start of 2022 saw the implementation of SFDR Article 11, which meant that periodic product disclosures became a part of EU law. Firms were required to report on their ESG metrics from the months prior to this 1st January deadline.
Taxonomy regulations meant that, under TR Article 8, fund managers had to disclose the proportion of assets exposed to taxonomy. This applied to both eligible and non-eligible economic activities. The taxonomy established the technical screening criteria that had to be satisfied for an economic activity to be considered contributory to climate change objectives, climate change mitigation, or climate change adaptation.
TR Article 5 improved transparency with regard to environmentally sustainable investments. TR Article 6 also sought to increase product disclosures, specifically those pertaining to financial products promoting environmental characteristics.
In April, the European Commission set out the final draft of Level 2 SFDR Regulatory Technical Standards (RTS). This document also included the final draft of the Principal Adverse Impacts (PAIs).
At the end of 2022, SFDR Article 7 will be enforced, requiring fund managers to disclose information on product-level PAI considerations. For further information on PAIs, take a look at our previous blogs:
As with 2022, 2023 will begin with the introduction of new rules regarding taxonomy. In 2023, a separate delegated act will establish the technical screening criteria for the remaining four environmental objectives identified under the EU Taxonomy framework:
Sustainable use and protection of water and marine resources.
Transition to circular economy.
Pollution prevention and control.
Protection and restoration of biodiversity and ecosystems.
TR articles 5 and 6 product disclosures will come into force on 1st January. Under these new rules, product disclosures for these additional environmental objectives will be required by EU law.
Level 2 SFDR RTS will be enforced in January. The Commission has confirmed that there will be a 6-month delay before these disclosures will be required. The first PAI report should be submitted by 30th June 2023.
30th June will be the due date for FMPs' first PAI statements. These disclosures will be provided for the reference period from 1st January 2022 to 31st December 2022.
Another year, another taxonomy development. Firms with financial undertakings must begin to disclose all of their KPIs on taxonomy alignment from 1st January 2024. This requirement will be set out by TR Article 8.
In June 2024, the second round of PAI statements will be due. In this instance, FMPs must disclose ESG metrics for the period between 1st January 2023 and 31st December 2023.
Many of these proposed ESG regulations will not become mandatory for months, and they will be subject to change. However, once actioned they will require businesses to disclose ESG metrics from this year. Take the 2021 SFDR, for instance. Disclosures won't be required until June 2023. However, firms will need to provide information for the period between 1st January 2022 and 31st December 2022.
Would you be able to provide this data now? If not, then you need to reconsider your approach to ESG measurement.
There's no time like the present. Recording relevant data now means your firm will be better equipped to respond to future disclosure requirements in the years to come. No matter what the European Parliament may announce.
With so many regulatory changes approaching, its vital that fund managers keep track of new developments. Establishing efficient systems to measure and report on ESG is great. But these systems need to be frequently reviewed to ensure they follow policy changes as well.
Updates to regulations tend to involve the addition of further topics. For fund managers, this means that more metrics will need to be disclosed. This could include further detail on biodiversity, increased pressure on Scope 3 emissions, information on green energy, and so on. Centralising these processes can make metric measurement more efficient.
KEY ESG's software breaks down complex topics into clear and manageable data points, driving efficiency in ESG reporting and ensuring firms are prepared for regulatory changes.
By collating all ESG data in one place, market participants can streamline their processes, expect the unexpected, and feel safe in the knowledge that they are up to date. Compare data between different assets. Access on demand infographics to feed back to stakeholders. And ensure all portfolio companies understand your strategy and work towards the same goal.