European Green Finance and Sustainability Proposals – Impact for Asset Managers

In this ESG-focused podcast, asset management partners Isabel Dische and Eve Ellis discuss the United Kingdom’s recently published Green Finance Strategy, the European Union’s Action Plan on Sustainable Finance and how these initiatives may impact asset managers.

Transcript:

Isabel Dische: Hello, and thank you for joining us today on this Ropes & Gray podcast, the latest in our series of podcasts and webinars focused on ESG and corporate social responsibility issues. I’m Isabel Dische, a partner in our asset management group based in New York and co-chair of our institutional investor practice. Joining me today is Eve Ellis, a partner in our asset management group who specializes in EU financial services regulation. As Eve is based in our London office she is well placed to speak about today’s topic - the United Kingdom’s recently published Green Finance Strategy, the EU’s Action Plan on Sustainable Finance and how these initiatives may impact asset managers. Eve, can you give us some background on the UK Government’s Green Finance Strategy?

Isabel Dische: Could you please explain what the term ‘green finance’ means? 

Eve Ellis: There are two main aspects of ‘green finance’ discussed in the Green Finance Strategy. The first one is ‘greening finance’ which means ensuring that current and future financial risks and opportunities from environmental factors are integrated into mainstream financial decision making. The second aspect is ‘financing green’ or accelerating finance to support the delivery of the UK’s green finance ambitions. Most listeners Isabel will be familiar with the second aspect but it is the first I think it would be useful to focus on today, as this is an area where our asset management clients may see some regulatory obligations being introduced in the not too distant future. 

Isabel Dische: That’s interesting Eve. What in particular is worth highlighting for asset managers and asset owners? 

Eve Ellis: As set out in the Green Finance Strategy, the Government expects publicly listed companies and large asset owners to disclose by 2022 how climate change risks and opportunities impact their activities. However, the scope of the proposed legislation is not that clear - the Green Finance strategy doesn’t define large asset owners (although we expect these will include pension funds) and we don’t know if the disclosures will be mandatory or not. We do know that they are going to be based on the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, which in June 2017 developed an optional framework to allow companies to report the financial impact of climate change. 

Isabel Dische: Can you describe what the Financial Stability Board recommended? 

Eve Ellis: That companies disclose information regarding four core elements of their operations: their governance (that is, governance around climate-related risks and opportunities), strategy (the impact of climate-related risks and opportunities on the company’s business, strategy and financial planning), risk management (how the company identifies, assesses and manages (related risks) and lastly metrics and targets (these are the metrics and targets used to assess and manage climate-related risks and opportunities). 

Isabel Dische: Are regulators involved in this initiative? 

Eve Ellis: Yes they are and it is an area of focus for them. A couple of examples of action by the financial services regulators include publishing a supervisory statement to enhance banks’ and insurer’ approach to managing the financial risks associated with climate change and publishing a consultation on building a regulatory framework for effective stewardship. This was conducted to consider how asset managers can integrate climate change and other ESG factors into their investment activities. 

Isabel Dische: So this initiative is UK focused - are there any similar initiatives at the EU level which we should be aware of? 

Eve Ellis: Yes – in March 2018 the European Commission launched an Action Plan on Sustainable Finance. This is a very comprehensive plan aimed at making European financial markets more sustainable. The plan covers many aspects of sustainability and we don’t have time today to cover all the details. However, importantly the plan includes a proposal for a regulation on disclosures relating to sustainable investment and sustainability risks, called the ‘Disclosure Regulation’. The regulation is not yet in force and is subject to change but if it is introduced as currently drafted it would impact many of our asset management clients in Europe. 

Isabel Dische: What does sustainability mean in the context of the EU rules? 

Eve Ellis: Sustainability can be quite a nebulous concept and the EU rules expand on what people may think of as being covered by the term sustainability. For example, in addition to ESG, the regulations also include matters such as human rights and anti-corruption. 

Isabel Dische: What types of firms will be affected by the Disclosure Regulation? 

Eve Ellis: The current proposal (which was adopted by the European Parliament a couple of months ago) casts a very wide net and entities required to make disclosures include fund managers, investment firms and possibly certain institutional investors. The list of affected entities is therefore much wider than under the Green Finance Strategy. 

Isabel Dische: Eve, do you think the proposals will impact US asset managers?

Eve Ellis: It is not clear at this stage whether they will. However, US asset managers marketing products in the EU currently need to comply with certain general disclosure requirements and I suspect EU Member States may require compliance with the new disclosure rules as well. 

Isabel Dische: How do the actual disclosure requirements compare to that of the Green Finance Strategy? 

Eve Ellis: The Green Finance Strategy is still at a preliminary stage so it is difficult to say definitively. However, the obligations under the Disclosure Regulation are wider and more prescriptive and will also be mandatory. They will also include obligations to publish policies and other information on a firm’s website. 

Isabel Dische: Now we know that the UK is due to be soon leaving the European Union. What is the UK’s approach to the Disclosure Regulation in light of Brexit? 

Eve Ellis: I don’t think Brexit will have a significant impact - the UK Government wants to ensure that it has the option of onshoring the Disclosure Regulation into UK law, regardless of the Brexit outcome, which is logical given its focus on green finance. 

Isabel Dische: Eve, is there anything you would like to add to finish this podcast? 

Eve Ellis: Sure, Isabel. Whilst the disclosure recommendations set out in the Green Finance Strategy are somewhat unclear and the Disclosure Regulation has not been finalized, clients should be aware that these proposals will come into force and most likely sooner rather than later. What is clear, is that the direction of travel is that managers will not be able to merely pay lip service to this issue going forward. They will need to substantively consider it and make associated disclosures. This will come with administrative and cost burdens, which are less likely to be a concern for the larger managers but will impact smaller ones. 

Isabel Dische: Thank you, Eve, for joining me today for this discussion. And thank you to our listeners. For more information on the topic we discussed today, or other topics of interest to the ESG and impact investing community, please visit our website at www.ropesgray.com. And of course if we can help you navigate any of these areas, please don’t hesitate to contact any one of us.