July 2024 Newsletter

We hope you’re enjoying the sunshine. Here are the top ESG stories this month. The ESMA recommendations are particularly notable for all asset managers with Article 6 funds.

ESMA Proposes Sustainability Disclosures for ALL Financial Products

The European Securities and Markets Authority (ESMA) has proposed that all financial products disclose basic sustainability information, including key performance indicators such as GHG emissions, biodiversity impact, EU Taxonomy alignment, and human and labour rights. This recommendation could extend sustainability reporting to Article 6 funds. ESMA's suggestions aim to enhance transparency and comparability among financial products. Additional recommendations include using the EU Taxonomy as a common sustainability reference, completing the taxonomy for all sustainable activities, defining transition investments, creating a product categorization system, improving ESG data consistency, and testing policies with consumers and industry. If adopted, these changes would significantly impact Article 6 fund managers. The EU Commission will review these proposals to determine the future of SFDR. LINK

European Parliament publishes study into SFDR

The European Parliament's study on the Sustainable Finance Disclosure Regulation (SFDR) highlights its complexity and limited utility for retail investors. It suggests simplifying product labels, enhancing the interaction between SFDR and other disclosure rules, expanding the scope of Principle Adverse Impacts, and improving the information infrastructure. The study criticises the SFDR's complex and unintuitive disclosures, noting that investors struggle to differentiate between Article 8 and Article 9 funds. The study also raises the misuse of the SFDR as a de facto labelling regime, which increases greenwashing risks. It proposes new product categories, including "impact" and "transition" categories, and calls for better alignment with other sustainability regulations like the EU Taxonomy and Benchmark Regulation. LINK

FRC announces significant update to the UK Stewardship Code

The Financial Reporting Council (FRC) has announced revisions to the UK Stewardship Code application process, focusing on five priority areas: Purpose, Principles, Proxy Advisors, Process, and Positioning. These changes aim to support the UK capital markets, reduce reporting burdens, and improve stewardship outcomes. Key revisions include reducing annual reporting requirements, allowing the reuse of previous reports, and clarifying outcome expectations. The adjustments will be effective from 31st October 2024 and are expected to ease the application process for signatories. Following stakeholder engagement, the FRC will consult publicly later this year and continue focussed discussions in August and September. The Code now has 287 signatories managing £50.1 trillion in assets. LINK

Sustainability disclosure and labelling regime

The FCA has updated its webpage with a "Sustainability disclosure and labelling regime" section for funds using labels under the Sustainability Disclosure Requirements (SDR). This section details how firms should notify the FCA about label use and apply for changes to fund names, aims, or policies. All FCA-authorised firms must follow an anti-greenwashing rule, ensuring fair, clear, and non-misleading sustainability claims. UK asset managers must meet investment label, disclosure, and marketing rules. UK asset managers must assess products for sustainability labels, meet naming and marketing requirements, and prepare necessary disclosures. Distributors must make labels and disclosures available to retail investors and notify them about overseas funds' non-compliance. Investment labels can be displayed from 31 July 2024, with naming and marketing rules effective from 2 December 2024. LINK

ESMA’s Final Report on Greenwashing

The European Supervisory Authorities (EBA, ESMA, and EIOPA) recently published their Final Reports on greenwashing in the financial sector, following a 2022 request from the European Commission. They define greenwashing as misleading sustainability-related statements or actions. The ESMA report, crucial for fund managers, suggests remediation actions: substantiate claims, monitor high-risk areas, invest in expertise and IT systems, adapt governance, exercise caution in advertising, and improve ESG due diligence. ESMA also urges the European Commission to adopt Regulatory Technical Standards for better SFDR disclosure access and to mandate guidelines on marketing communications. ESMA plans to develop greenwashing risk indicators, deploy supervisory technology, and establish a Common Supervisory Authority for sustainability integration in 2024. LINK

If you’d like to know more or discuss any of the topics please get in touch.