ESG regulation. Two words that provoke strong emotions for most people within the asset and wealth management industry. These are often emotions like frustration and confusion as well as nervousness around scope, requirements and workload. And, perhaps with good reason. New ESG regulation does seem to pop up everywhere, and it’s impacting investment managers left, right and centre.
The UK leaving the EU has definitely not made navigating the complexities of ESG regulation any easier. Some might have thought that Brexit would limit the impact of the EU’s sustainability regulation in the UK, but since most investment managers have products, entities and/or clients in the EU, the rules still apply. And without international alignment on regulation, we are seeing different countries taking different approaches to similar topics (e.g. SDR in the UK and SFDR in the EU).
As reporting is our specialty at Opus Nebula, let’s take a look at key ESG regulation with reporting requirements for investment managers:
- EU Taxonomy – This regulation came into force 12th July 2020, and it created a classification system for sustainable economic activities. The Taxonomy is directly linked to SFDR
- Sustainable Finance Disclosures Regulation (SFDR) – This regulation came into effect 10th March 2021 with the technical standards applicable from 1st January 2023
- Task Force on Climate Related Financial Disclosures (TCFD) – The first reporting deadline was 30th June 2023 for firms with AUM above £50 billion, and smaller firms must report by 30th June 2024
- Sustainability Disclosure Requirements (SDR) – This regulation aims to provide transparency to consumers on the sustainable products they invest in, and a Policy Statement is intended to be published in Q3 2023
Each of these regulations have initiated a number of important discussions within the industry not only around the exact regulatory requirements, but also discussions going back to basics and asking: what do we actually mean when we say ‘sustainable’?
3 Key Challenges for Investment Managers
To keep things simple (on a topic that is far from simple…), we have summarised the key challenges we see investment managers facing in 3 points:
- Lack of consistent international disclosure frameworks – It is costly, difficult and time consuming for investment managers to fulfil all regulatory ESG requirements in the jurisdictions in which they operate. Without increased international cooperation and alignment, this is only likely to get harder in the future.
- Inconsistent data reported by companies – Data quality and availability is currently a significant challenge with respect to ESG client reporting and regulatory disclosures. Companies take a whole range of approaches to reporting on ESG – both with respect to what they report and how much they report. And of course, large companies within the developed markets report more, on average, than those that are smaller or those based in developing markets.
- Discrepancies between regulatory requirements and client needs – Not only are investment managers impacted heavily by the regulation, they also handle a large amount of requests for ESG data and information from their underlying clients. This can be extremely resource intensive and very demanding – especially as there may be discrepancies between regulatory requirements and client needs.
We can help!
Opus Nebula are here to help. Unfortunately, there isn’t much we can do about Point 1, but we do hope to see better international alignment in the future. Point 2 has gained significant attention over the past few years, resulting in the EU’s Corporate Sustainability Reporting Directive being introduced on the 5th January 2023 (applicable in the 2024 financial year) as well as the IFRS Sustainability Reporting Standards, which are effective for annual reporting periods beginning January 1st 2024. This should make ESG reporting across companies more consistent, which will have a positive impact on the quality of all types of ESG reporting.
Point 3 is right in our sweet spot. We have a nimble and customisable solution that gives you great flexibility in accessing your ESG data as well as efficiency in the way you use it. We can also create the required regulatory reporting templates, and make sure everything is set up to be as light on resources, and as efficient as possible.
If you would like to discuss how we can help you optimise the processes around your ESG regulatory disclosures, please do reach out to us here. We look forward to speaking to you!