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Coronavirus - Financial Services in the Post COVID World - What does it mean for the ESG and Sustainability Agenda?

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“This is not just another piece of financial regulation...ESG has to be at the top of peoples’ agenda as we move into the new world.” This was one of the opening remarks from a panel member speaking at a webcast Eversheds Sutherland held on Wednesday 24 June 2020. Together with colleagues from our financial services team, we were delighted to be joined by a member from each of the Financial Conduct Authority and the Investment Association to chat through what the ESG horizon looks like for asset managers in the shadow of COVID. This summary sets out some key themes from the panel discussions.

Although COVID may have accelerated a realisation that we need to be more sustainable, the ESG agenda is not a new concept in this space. Asset managers were starting to shift their focus to the wealth of regulatory initiatives, and the impacts that these will have on their day-to-day operations, before the implications of COVID took hold. The view of some in the industry is that this is a sector which will not pause and wait for COVID to pass before taking further action, but instead will push on with an increased focus on ESG, whilst being mindful of recovering from COVID in a way that imbeds sustainable investment, an echo to the UN’s Secretary General’s comments that the planet’s unfolding environmental crisis is an even deeper emergency than COVID (as reported in a BBC article in April which can be found here).

However, there are some key challenges facing firms:

Immediate focus is required - to contend with the relatively short time frames being imposed by the many incoming regulations, firms now really do need to turn their attention to ensuring investors have access to products which meet their investment needs and preferences. The disclosures for these products need to be accessible, sufficiently concise and pointed so as to allow investors to make informed decisions and these disclosures will need a lot of consideration and work. Integrating sustainability considerations into investment decisions will shortly become “business as usual” for asset managers, and this is reflected in updates that are coming to UCITS, AIFMD and MiFID II. This will mean an array of document and internal policy updates.

Getting products to market – firms looking to launch new products, or amend existing products, need to be aware that there is a need for alignment between a fund name, investment strategy, portfolio composition and disclosures to the end investor (regardless of whether a fund is actively or passively managed). There are challenges that need to be addressed with respect to the amount of information disclosed to investors at the point of entry as well as on an going basis through reporting. It is hoped that further guidance will be gleaned through the UK’s implementation of the Regulation on sustainability‐related disclosures in the financial services sector (the Disclosure Regulation or SFDR) but clearly there is a lot to consider when telling the story of an ESG product and bringing it to market. For FCA-authorised funds, it is anticipated that these products will be scrutinised through the FCA approval process. We are in fact already seeing an increased focus, and this is not unexpected following a nod to non-financial objectives in the FCA’s Asset Management Market Study.

Data - the level and form of data required from the investee companies cannot be overlooked. This data will, amongst many other roles, inform decisions of the rating agencies, and will aid firms in describing the characteristics of their products, including investment strategies. However, the current inconsistencies in coverage and disclosures hamper a harmonised approach and this is something which will need greater attention.

What really is ESG – do we all interpret the E S and G in the same way? For example, is it clear what “governance” means and how it applies? In addition, although the past few months have seen a lot of press in respect of social movements, for example, the Black Lives Matter movement, this social element has perhaps not had the same amount of focus when it comes to the regulations – for example, the Taxonomy is light on this compared with environmental factors. Although it certainly has had some attention, this is light touch when compared to the granular detail we are seeing on environmental matters and there may be a certain amount of catching up to do. It is critical that disclosures around the use of these concepts are clear to help counter concerns about greenwashing and the misselling of products.

Do investors always want a financial return – the received wisdom used to be that if investors wanted an ESG return, there would be a trade-off in the financial return produced by a fund. However, this is not the case anymore and there is evidence that some ESG products are in fact producing better returns than more traditional financial return products.

What about Brexit? - some of the EU sustainability initiatives are already in place, or will be implemented shortly, but for many other initiatives flowing down from Europe the extent of their application in the UK is still unknown. The UK is very much invested in the wider ESG agenda and, in its Green Finance Strategy last year, the Government committed to at least match the ambition of the key objectives of the EU’s Sustainable Finance Action Plan. However, we still don’t have all of the information yet and as the days tick away we are in danger of being left with little time to fully understand the extent of the requirements which will apply. More generally, this sector needs to be proactive in taking steps to obtain further guidance from Government and through policy changes to facilitate the implementation of these initiatives.

Eversheds Sutherland is advising a number of clients on the implications of the key ESG requirements. If you would like help on training, scoping, interpretation, disclosures or mapping of these requirements across different jurisdictions please contact Michaela Walker.

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