The EU and UK FCA have both issued regulatory updates affecting asset managers during April.
We summarise the latest changes for you covering:
EU Sustainable Finance- April Package
To continue to facilitate the re-orienting of investment towards sustainable technologies and businesses, the EU announced a series of further changes:
The highlights of the changes are set forth below:
Proposed Corporate Sustainability Directive (CSRD)
· Extends scope of the NFRD for reporting companies listed on regulated markets (except listed micro-enterprises)
· Requires the audit (assurance) of reported information
· Introduces more detailed reporting requirements in line with EU sustainability reporting standards
· Requires companies to digitally ‘tag’ reported information to feed into the European single access point
EU Taxonomy Climate Delegate Act
Enhancement to directives relating to suitability and appropriateness assessments and product governance to ensure investors/consumers sustainability preferences are taken into consideration
· Delegated Directive 2010/43/EU- Sustainability factors for UCITs
· Delegated Regulation amending Delegated Regulation EU No. 231/2013- Sustainability risks and sustainability factors by AIFM’s
· Delegated Regulation amending Delegated Regulations EU2017/2358 and EU2017/2359- integration of sustainability factors, risks and preferences into the product oversight and governance requirements for insurance and insurance based investment products
· Delegated Directive amending Delegated Directive EU2017/593- integration of sustainability factors into product governance obligations
· Delegated Regulation amending Delegated Regulation EU2015/35- integration of sustainability risks in the governance of insurance and reinsurance obligations
· Delegated Regulation amending Delegation Regulation EU2017/565- integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms.
Amendments to Delegated Acts
EU– Corporate Sustainability Reporting Directive (CSRD)
Integrity of Sustainability Reporting
‘The transition to a sustainable economy is likely to mean that collecting and sharing sustainability information becomes common business practice for companies of all sizes’
The EU indicated that the absence of clear sustainability reporting policy will increase the gap between user’s information needs and sustainability information, consequently, a proposal to amend Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation EU 537/204 as regards corporate sustainability reporting.
The proposals put forth, followed an evaluation of the scope of the Non-Financial Reporting Directive (NFRD) which requires large companies to report sustainability information on an annual basis with a ‘double’ materiality provision, meaning that companies have to report about how sustainability issues affect their business and about their own impact on people and the environment- however evidence suggests that the relevant information is omitted which may also be due to the lack of precision in the current requirements given the large number of private and variable frameworks.
The over-arching objectives and changes of the amendments are:
Summary of the salient changes:
Scope of the NFRD applies primarily to public interest entities, listed companies, banks and insurance companies.
The NFRD applies to ‘large’ companies that have more than 500 employees, therefore the NFRD only covered approximately 11,000 entities. The CSRD proposes to expand the scope of coverage to increase beyond the current NFRD in-scope entities to SME’s but excluding listed micro-enterprises.
Additional reporting would apply to SME’s with securities listed on regulated markets using simpler standards than currently apply to larger listed entities. SME’s listed on EU regulated markets would have a phasing-in period to accommodate the COVID-19 implications for such SME’s.
Reporting requirements would NOT apply to SME’s with transferable securities listed on SME growth markets or multilateral trading facilities (MTFs).
Non-listed SME’s may choose to voluntarily use the simpler reporting that is intended to apply to listed SME’s.
The European Financial Reporting Advisory Group (EFRAG) will be responsible for developing the draft standards. EFRAG aim to have the first draft standards ready by mid-2022.
These standards would take into account the global work on alignment of sustainability reporting across IFRS, GRI, SASB, IIRC, CDSB and CDP.
The proposals aim to introduce an EU-wide audit requirement for reported sustainability information, based on a progressive approach to implementation. This will help to ensure that reported information is accurate and reliable.
Limited assurance approach initially, but could move to a requirement for reasonable assurance standard if the Commission adopts sustainability assurance standards.
The Commission’s proposals allows Member States to open up the market for ‘sustainability assurance services providers’ to firms other than usual auditor’s financial information to assure sustainability information.
Mid 2022– EFRAG intends to issue the first draft of the standards
End 2022– First set of reporting standards released, subject to Council approval
2023– Standards would apply
2024– First audit reports released using the new reporting standards
Amendments to EU 2013/34
Information to be included in management reports to understand the undertakings impact on sustainability matters, and information necessary to understand how sustainability matters affect the undertaking’s development, performance and position.
Relevant exemptions apply for consolidated management reports for group entities.
Applies to large undertakings, and
SME’s from January 1, 2026
Sustainability Reporting Standards
The Commission shall adopt sustainability reporting standards specifying the information that undertakings are to report in accordance with Article 10a and 29a, and the structure in which the information shall be reported.
The sustainability reporting standards should specify the information that undertakings are to disclose about
a) environmental factors, including information about:
· Climate change mitigation
· Climate change adaptation
· Water and marine resources
· Resource use and circular economy
· Biodiversity and ecosystems
b) Social factors
c) Governance factors
Single electronic reporting format
Undertakings subject to Article 19a shall prepare their financial statements and management report in a single electronic format in accordance with Article 3 EU 2019/815 and mark up their sustainability reporting in accordance with Article 8 of EU2020/852
Undertakings subject to Article 29a shall prepare their consolidated financial statements and their consolidated management report in a single electronic format in accordance with Article 3 EU 2019/815 and mark up their sustainability reporting in accordance with Article 8 of EU2020/852
Consolidated Sustainability Reporting
Parent undertakings of large groups shall include consolidated management report information necessary to understand the group’s impacts on sustainability matters, and information necessary to understand how sustainability matters affect the group’s development, performance and position.
Member States must set forth penalties for infringement.
· Amendments to Directive 2004/109/EC
· Amendment to Directive 2006/43/EC
· Amendment to Regulation EU 537/2014
EU– Taxonomy Climate Delegated Act
The EU Commission issued supplementing regulation to EU2020/852 (Taxonomy) and defining technical screening to determine the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives.
The changes present technical clarifications and simplifications of those criterion in response to feedback and comment received. Technical standards for agriculture being delayed to accommodate further negotiations for the common agriculture policy (CAP).
The supplemental changes to the Taxonomy regulations are set forth below:
Financial Conduct Authority
Changes to UK MIFID’s conduct and organizational requirements (CP21/9)
SME and Fixed Income, Currencies and Commodities (FICC) Research
Best Execution Reports (RTS 27 and 28)
These proposals are in line with the capital markets reform work covering priority items such as:
FCA Climate Change and Sustainable Finance
The UK FCA reminds the market of the objective of its sustainable finance following the Chancellors letter addressed to the FCA, on March 23, 2021, which set forth the government’s desire to deliver a financial system which supports and enables a net-zero economy by mobilizing private finance towards sustainable and resilient growth and resilient to the physical and transition risks that climate change presents. The FCA is to have regard to the government’s commitment to achieve a net-zero economy by 2050 under the Climate Change Act 2008 (Order 2019). In this regard, the FCA highlighted the sustainable finance strategy as incorporating the following 3 core components: strategy being:
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