Key items for your agenda in 2024
Our standout items
Corporate Sustainability Reporting Directive (CSRD)
What’s happening?
The EU’s CSRD will require many large entities to report on the impact that their operations and those of their broader value chain have on society and the environment, as well as on their alignment with the EU Taxonomy.
So what?
The CSRD will create a significant new reporting requirement for many asset managers and their large EU portfolio companies.
Most EU-listed entities must report data for financial years starting on or after 1 January 2024, with first reports published in 2025. Other companies – which will include some larger unlisted asset managers and their private portfolio companies – will fall into scope later. Most imminently, “large” EU companies will be in scope for financial years starting in 2025, with first reports due in 2026.
How the reporting process will play out in practice is still somewhat unknown, as entities struggle with the question of who is within their value chain. Alternative asset managers could receive extensive information requests from both upstream and downstream actors with whom they have business relationships. Relevant information can be difficult to compile, and asset managers and their large portfolio companies need to put systems in place to gather it.
TCFD reports to be published by UK-regulated smaller asset managers (£5-50bn assets under management/advice)
What’s happening?
The Task Force on Climate-Related Financial Disclosures (TCFD) developed a sustainability reporting framework, and most significant economic actors in the UK will be required to report using it in the next few years – indeed, many already are.
UK-regulated asset managers with between £5 billion and £50 billion of assets under management or (in some cases) advice, must prepare TCFD reports in line with the FCA’s rules for the first time in 2024.
So what?
Reports must be published no later than 30 June 2024, and there must be no period after 1 January 2023 that is not covered by a TCFD report.
Asset managers will need to have adequate systems in place to comply with their reporting requirements. A point to watch out for is that the FCA rules feature some gold-plating, so any reports prepared up until now on a voluntary basis will have to be checked.
Other things to keep a close eye on
New UK sustainability reporting and disclosure rules and a voluntary labelling regime
What’s happening?
A raft of new UK sustainability reporting and disclosure rules are set to come into force. UK-regulated firms marketing to retail investors will be most affected, but all UK-regulated firms will be affected to some extent.
All FCA authorised firms will become subject to an “anti-greenwashing rule”, to make sure sustainability-related claims are fair, clear and not misleading, while UK asset managers (including AIFMs) will also have the opportunity to opt into a labelling regime with four new sustainability labels. The labels will be accompanied by rules on naming and marketing investment products intended for retail investors; and new disclosure requirements will supplement the existing TCFD disclosure requirements for firms with more than £5 billion of assets under management.
In addition, new distributor rules will also apply to FCA authorised firms that distribute certain funds to UK retail investors. There may also be extensions to the regime in due course to portfolio managers and overseas funds.
The UK also issued its Green Finance Strategy in 2023 which includes a number of future sustainability initiatives including a UK Green Taxonomy. In addition, the UK has committed to adopt the first two sustainability reporting standards issued by the International Sustainability Standards Board: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. In time, these seem likely to be rolled out across the UK economy in the same way as the TCFD reporting rules (which IFRS S2 will ultimately replace), with listed companies likely to be affected first.
What does this mean for me?
There is no single answer to how these various changes will impact alternative asset managers. This will generally depend on the strategy of the relevant fund, with UK retail sustainability funds likely to be the most affected.
The anti-greenwashing rule applies from 31 May 2024. FCA guidance on its application is expected, following a consultation. FCA authorised firms will need to consider their communications carefully and update as appropriate.
The labelling regime applies from 31 July 2024. UK asset managers will need to consider whether to label their products (taking into account the relevant criteria). Disclosure requirements for labelled products (and associated naming and marketing rules) will also start to apply.
New distributor rules will start to apply from 31 July 2024. Other disclosure requirements (and associated naming and marketing rules) start to apply from 2 December 2024. The first entity level disclosures will be due on 2 December 2025. Asset managers and portfolio companies that apply UK reporting rules should familiarise themselves with the IFRS standards and prepare for their future application. The IFRS Foundation have issued this helpful comparison of TCFD standards and IFRS S2.
Understanding the impact your business has on the environment and society is now a must – investors, regulators and other stakeholders increasingly require it. That isn’t going to change; indeed, European regulation will continue to raise the bar.
Simon Witney
Senior Consultant
EU Taxonomy
What’s happening?
The EU Taxonomy is a classification system that describes “environmentally sustainable” economic activities. It will become increasingly common for companies and funds to report against it in 2024. The EU continues to work on the Taxonomy, and more of the detailed rules are now in force. These include the granular rules for the four non-climate-related sustainability objectives, and amended rules for the two climate-related objectives that are already in force.
So what?
The amended and new Taxonomy criteria took effect on 1 January 2024.
Taxonomy disclosures must now take into account the (amended) climate change objectives and the other four environmental objectives, subject to any transitional provisions. Any entities required to prepare a sustainability report under CSRD must also prepare a Taxonomy report, based on all six environmental objectives.
Delegated acts and regulatory technical standards may not sound interesting (and they are not!), but it will be important that asset managers are up to speed with the new rules, especially those who are reporting the Taxonomy alignment of their portfolio.
The patchwork of climate and sustainability reporting requirements presents a major challenge to even those businesses who are further ahead on their ESG journey. Establishing robust governance arrangements and data processes, while not duplicating efforts, is very likely to be a worthwhile investment at this stage.
Sarah-Jane Denton
Director
EU Corporate Sustainability Due Diligence Directive (CS3D)
What’s happening?
The EU’s CS3D will impose a positive obligation on affected entities (which will include some non-EU entities) to identify, assess and act against environmental and human rights impacts relating to their business, potentially very broadly across their value chain.
What does this mean for me?
The EU reached political agreement in December 2023 on CS3D, including excluding from scope, in the short term at least, the downstream activities of financial institutions. Though all the details are not yet known, the most likely timetable would be for EU entities to be subject to CS3D from 2026 or 2027; non-EU entities over certain value thresholds will have three years from entry into force of the directive to comply.
Given the expected burden of complying and potentially significant consequences for non-compliance, including liability to stakeholders, those affected will need to start preparing sooner rather than later.
The ESG landscape refuses to stand still. We see a particular shift – not just in the EU but also in the UK in both legislation and courts – towards making businesses responsible for the full range of impacts arising from their operations. Financial and investment sector clients with diverse portfolios across numerous sectors may not have been the natural targets for (nor taken into account in the drafting of) such actions, but nonetheless need to find ways to comply and embrace what we expect to be a lasting change.
John Buttanshaw
Director
EU SFDR
What’s happening?
SFDR is the EU’s sustainability reporting framework for financial market participants. It applies to EU-regulated asset managers, as well as non-EU firms marketing funds into the EU.
It is likely that there will be changes to the Principal Adverse Impacts (PAIs) disclosures and the SFDR reporting templates, following recommendations made to the Commission by the European Supervisory Authorities in December 2023.
Final guidelines on funds’ names using ESG or sustainability-related terms are also expected in the near future.
Separately, the European Commission has consulted on more fundamental changes to the SFDR, although that is not likely to lead to any imminent changes.
So what?
Changes to the templates are likely in the next 12 months or so.
Final guidelines on funds’ names using ESG or sustainability-related terms are also expected in mid-2024. We’ll keep you posted.
More fundamental changes to the SFDR, following the consultation in 2023, are expected in the second half of the decade.
