A Primer: The Moving Target of ESG Regulation

In recent years, Environmental, Social, and Governance (ESG) factors have gained immense significance in the asset management community. Global events and the ongoing ambitious regulatory agenda have catapulted ESG investing to the forefront, creating a compliance quagmire for firms due to the evolving sets of ESG reporting rules and guidelines put forth by regulatory bodies around the world.

In the United States, the SEC recently took a significant step toward ESG regulation with its proposal of a climate-related disclosure framework. Recognizing the importance of ESG investing, the SEC included it as one of the significant focus areas for the year in its 2022 examination priorities. However, Europe has been leading the way in ESG regulation, with several directives, initiatives, and regulations already in place.

Key ESG Reporting Directives and Regulations

Europe has implemented a suite of ESG reporting directives and regulations to foster sustainable finance. Some of the notable ones include:

• Non-Financial Reporting Directive (NFRD):This directive imposes granular disclosure requirements on EU issuers, ensuring transparency and accountability in their ESG practices.
• Second Shareholder Rights Directive (SRD II): SRD II aims to promote shareholder engagement and long-term sustainability considerations by encouraging shareholders’ active involvement in corporate governance.
• Sustainable Finance Disclosure Regulation (SFDR): SFDR mandates EU financial market participants to consider ESG risks and report their integration into investment decision-making processes. It classifies financial products into Article 8 (environmental and/or social characteristics) and Article 9 (sustainability objectives) categories.
• Climate Benchmarks Regulation (CBR): CBR establishes rules for climate benchmark indices, promoting transparency and standardization in measuring the carbon footprint of investment portfolios.
• Prudential Legislative Texts: These texts provide guidelines for financial institutions regarding the integration of ESG risks into their risk management and supervision processes.
• Taxonomy Regulation: The Taxonomy Regulation defines the criteria for determining environmentally sustainable economic activities, providing a common language for sustainable finance across the EU.
• EU Green Bond Standard: This standard ensures the credibility and transparency of green bonds, supporting investments in projects with positive environmental impacts.
• EU EcoLabel: The EU EcoLabel certifies products and services that meet high environmental standards, aiding consumers in making sustainable choices.

According to a recent Cerulli Associates report, complying with the SFDR is proving quite challenging due to factors such as the availability of ESG data and its associated costs. Additionally, the amount of time and resources required to convert “non-ESG integrated products into funds that comply with certain ESG requirements” was also cited as a challenge for 59% of the asset managers surveyed.[1] Obtaining reliable and comprehensive ESG data is crucial for effective ESG integration. Moreover, converting non-ESG integrated products into funds that comply with ESG requirements demands substantial time and resources.

The Role of ESG Platforms

To navigate the complex ESG reporting landscape and streamline compliance processes, asset managers can leverage ESG platforms such as the IVP ESG Management platform. It offers a range of features and benefits:

• ESG Reporting: IVP ESG Management enables users to create comprehensive ESG reports and disclose relevant information to investors. These reports can adhere to various frameworks like Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), and Sustainability Accounting Standards Board (SASB).
• Customization and Flexibility: It can be tailored to meet specific client requirements and align with their unique ESG vision. This customization allows asset managers to generate reports that best represent their ESG initiatives and strategies.
• ESG Data Optimization: By specializing in reducing data requirements, it maximizes data utility. Using advanced analytics and reporting capabilities to extract valuable insights from ESG data, asset managers can make informed decision making.
• Regulatory Compliance: It enables asset managers to stay up to date with evolving regulatory frameworks and adapt their functionalities accordingly. By seamlessly incorporating regulatory requirements into the reporting processes, IVP ESG Management helps funds comply with the changing ESG landscape.

As ESG factors continue to shape the asset management industry, complying with evolving ESG regulations becomes increasingly crucial. The SFDR, alongside other directives and regulations in Europe, has set a high bar for ESG reporting and integration. Asset managers must overcome challenges such as data availability and conversion efforts to meet these requirements. By leveraging advanced ESG platforms like the IVP ESG Management platform, asset managers can streamline their ESG reporting processes, ensure compliance, and demonstrate their commitment to sustainable finance. As the regulatory landscape continues to evolve, staying ahead with robust ESG management practices and reliable ESG platforms will be paramount to the success of funds and asset managers.

IVP ESG Management is uniquely positioned to help asset managers establish a reliable framework for ESG investing — one that supports regulatory reporting, accurate and efficient portfolio construction, asset allocation, risk management and compliance, and more.

[1] Hazel Bradford, “Sustainability disclosure remains a challenge, Cerulli reports,” Pensions & Investments, April 1, 2022.