A Primer: The Moving Target of ESG Regulation

A Primer: The Moving Target of ESG Regulation

Global events and the ongoing ambitious regulatory agenda have catapulted ESG to the forefront of the asset management community, 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 towards ESG regulation with its proposal of a climate-related disclosure framework. It later released its 2022 examination priorities, which listed ESG investing as one of five significant focus areas for the year. Although the US is clearly making strides on this front, Europe is already well underway with a suite of ESG reporting directives, initiatives and regulations, such as:

  • Non-Financial Reporting Directive (NFRD)
  • Second Shareholder Rights Directive (SRD II)
  • Sustainable Finance Disclosure Regulation (SFDR)
  • Climate Benchmarks Regulation (CBR)
  • Prudential Legislative Texts
  • Taxonomy Regulation
  • EU Green Bond Standard
  • EU EcoLabel

Amongst these, the SFDR is a ESG regulation that remains a top concern for asset managers. Under the SFDR, EU financial market participants – including UCITS funds and AIFs – are expected to consider ESG risks and to report the incorporation of such sustainability risks into their investment decision-making processes. Different types of funds are defined by the SFDR for the classification of their financial products with an ESG focus:

  • Article 8 products are financial products that promote environmental and/or social characteristics and require disclosure of the fulfillment of the product’s environmental and social characteristics.
  • The products referred to in Article 9 are financial products with a sustainability objective and require disclosure of the objectives and how they are met by the product.

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] As the legislation with which SFDR interacts continues to evolve, its requirements will do the same. This includes the EU Taxonomy Regulation, which details the criteria for what constitutes sustainable activities, and the NFRD, which ultimately imposes the requirements for granular disclosure on EU issuers.

IVP’s Regulatory Reporting solution allows users to create ESG reports and report disclosures for investors. The application supports multiple frameworks such as GRI, TCFD and SASB. While generating standardized reports as part of the basic setup, the application can also be customized to generate reports in line with each client’s requirements and ESG vision. IVP specializes in reducing data requirements while maximizing the utility of data and creating multiple reports for users – making the ESG reporting process seamless as the regulatory landscape continues to evolve.

To learn more, visit  Regulatory Reporting or contact sales@ivp.in.

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

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