EU’s ESG regs to have ‘big and immediate’ impact on US managers

New disclosure and reporting requirements are set to take shape in March 2021 and will have a range of impacts on US managers with even minor operations within the bloc.

The EU regulation on Sustainability-Related Disclosures, set to take effect on March 10, 2021, will have significant effects on US managers operating in the EU, according to panelists at The Association of the Luxembourg Fund Industry’s Digi Pulse USA Forum on Thursday.

“[The disclosure regulation] in a nutshell is about the integration of sustainability risk in the products that must be disclosed,” said Josiane Schroeder, counsel at Linklaters. “You have to comply with the regulation, or you have to explain why you can’t comply. So it is definitely not an option to do nothing.”

US managers with EU presence

For US managers with EU funds, “you have a big and immediate impact, because the first question you should be asking yourself is ‘in each category, what is the [classification] of my product?,’” said Nathalie Dogniez, partner at PwC.

An EU product with a sustainability focus will have to be clearly defined as an impact or sustainable product – one able to deliver a positive impact on a social or environmental objective, an ESG product, in which there are binding processes incorporating ESG elements, or a “normal” product that is not being promoted as ESG.

A manager will then have new reporting requirements based on the classification. “So this means that by [the deadline of] March 10, 2021, all the firms in the EU will require an update of the prospectus in one way or another,” Dogniez added. Even selling “normal” products in the EU will require that managers consider sustainability risk within the investment process, according to Dogniez.

Even non-EU products sold or marketed in the EU have to comply with the regulation, she noted. EU-based intermediaries also need to comply. And European managers and management companies will be required to post disclosures on their websites, including information regarding any US subsidiaries, by 10 March.

The reporting requirements could force an evolution that investors have been clamouring for – more data on how their assets impact ESG goals.

“If you are invested in EU assets or an EU company, you will be happy to hear that the EU has kicked off the project of imposing more requirements in terms of non-financial reporting information for EU companies,” Dogniez said. “Going forward, there will be more ESG or non-financial information available in the EU.”

Implementation challenges

The deadline for compliance is coming fast, so implementation will be a stretch for many private market participants. The regulation is also complex, the availability of ESG data is limited and changes to firms’ operating models will be required.

Firms will also have to comply with the updated Regulatory Technical Standards. Draft RTS were published last month but a final update has been pushed from its initial date to February 2022.

“The recommendation would be to take into account the RTS even though they are only in draft form, but knowing at the same time that you will probably have to beef up your disclosure later on,” Linklaters’ Schroeder said.

But panelists agreed that, despite compliance challenges, the regulation nonetheless represents the direction of travel for the entire industry.

“This is not just a compliance exercise, it is a strategic exercise,” Dogniez said. “The level of sustainability or ESG that you will include in your product will determine how successful you will be, not only on the European market, but increasingly worldwide.”