Latest News on ESG Regulations and Investing

Environmental, social and governance (ESG) factors have become a key discussion point in the asset  management industry, with many managers incorporating ESG considerations into the investment processes.  In 2019, ESG investment funds increased by $70 billion while traditional equity funds saw an outflow of $200 billion.  ESG investments continue to increase in comparison to “traditional” equity investments and ESG investments are performing better than traditional equity funds.

Major institutional investors are clearly communicating their expectation that companies institute a proactive ESG program and policies.  An effective ESG program attracts additional capital and is a way to embrace fast-arriving millennial demand for ESG values.  Employees want their companies to embrace ESG principles as a price for their loyalty and commitment to a company’s intangible reputation for social awareness, ethics and shared values.

Several SPACs (special purpose acquisition corporations) have launched in recent months focused on ESG considerations.  Former NFL quarterback and social activist Colin Kaepernick has co-sponsored a $250 million SPAC that aligns with ESG criteria and has an enterprise value of more than $1 billion.  ESG considerations continue to gain global importance as corporations are also quickly embracing ESG issues.  There are many important aspects of ESG initiatives that advance important principles of corporate accountability, responsibility and proactive measures that re-orient corporate decision making and essential governance questions.

The growth of ESG, however, is not completely self-generated but is responsive in part to investor and public demands.  Investors are conditioning capital investments on the existence and quality of a company’s ESG program.  ESG is a broad enough concept that it includes corporate attempts to build a strong corporate brand and promote long-term growth.

As previously discussed in Rimon’s IM Reports, there have been some key developments taking the form of new legislation and amendments – proposed and actual – to existing legislation. Of most significance are the Sustainable Finance  Disclosure Regulation (SFDR) and the Taxonomy Regulation which impact “Financial Market Participants” (FMPs) (which includes amongst others AIFMs, UCITS ManCos, Portfolio Managers and Advisors) in relation to “Financial Products” (which includes amongst others AIFs, UCITS and  segregated investment management mandates).

The SFDR, which took effect on March 10, 2021 affects both firms and products and requires three types of disclosure:

• website disclosure,
• pre-contractual disclosure and
• periodic reporting.

The SFDR requires FMPs to make significant changes to their pre-March 2021 processes.  There were, and remain, challenges to meeting the requirements of the SFDR.  The SFDR included provisions requiring the European Supervisory Authorities (ESAs) to prepare level 2 regulatory technical standards (RTS) to provide further detail and to assist in the application of the SFDR provisions before 30 December 2020.  However, in October 2020, the EU Commission announced that the RTS would not apply on  March 10, 2021 but would apply at a “later stage.”

On February 4, 2021, the ESAs published a final report on the RTS, which proposed changes to the original draft RTS that were published in April 2020 (the Revised RTS).  On February 25, 2021, the ESAs issued a Supervisory Statement on the application of SFDR, which confirmed the delay of the application of the SFDR RTS and proposed an application date of January 1, 2022, which is the date on which the Taxonomy Regulation takes effect.

The ESAs’ letter also included a summary table setting out the effective dates of the SFDR and Taxonomy Regulation disclosure obligations and recommended that national competent authorities
encourage FMPs to use the period from March 10, 2021 until  January 1, 2022 to prepare for the application of the RTS.  On January 7, 2021, the ESAs wrote to the EU Commission highlighting that they had encountered several important areas of uncertainty in the interpretation of SFDR and asked for clarification on a number of points.

We will continue to update Rimon’s IM Report on these developments.