Asset owners in Europe and financial services companies operating in the European Union will be required to disclose the impact of environmental, social and governance effects on their portfolios after the European Parliament and EU members agreed on new disclosure requirements related to sustainable investments and sustainability risks.
A proposed regulation, which is part of the European Union's overall package on sustainable finance in Europe — the European Commission Action Plan, launched in May 2018 — means asset owners, insurance companies and money managers will be disclosing how they are integrating ESG factors and how they adhere to ESG objectives in their investment decisions. Money managers and consultants will be required to show their own processes of ESG integration and the extent to which ESG risks are expected to affect the returns on strategies or funds sold, even if sustainable investment objectives such as renewable energy are not pursued.
This latest version of the disclosure regulation, which was approved by the EU institutions on March 7, added a new requirement to show if and how investments contribute to environmental damage by, for example, polluting water or reducing biodiversity. Strategies and funds sold by money managers, insurers and advisers will use a single disclosure toolbox to meet the required standards. Aimed at stopping money mangers from making unwarranted claims about the funds they sell, or so-called greenwashing, the disclosure requirements will ultimately boost transparency for retirement plan participants.
Pension fund executives and money managers welcomed this newest attempt but warned that the "adverse impact" reporting standards need to be clearly defined. David Russell, head of responsible investment at the £60 billion ($79.2 billion) Universities Superannuation Scheme, London, said: "The difficulty we foresee will be in gathering ESG data on underlying assets where it may or may not exist. We will therefore be interested to see how the 'adverse impact on ESG matters' requirement will be delivered and what such reporting will look like."