In order to strengthen sustainability in the European Union’s financial system, the Disclosure Regulation will come into force in just one year’s time. Asset managers need to prepare for this now and don’t have long time to adapt their processes. Dr Harald Glander, lawyer and partner at Simmons & Simmons in Frankfurt am Main, explains what to do by when.
Dr Glander, what are the obligations of asset managers under the new Disclosure Regulation?
Glander: In particular, the obligation to disclose information on sustainability risks and the adverse impacts of their activities on sustainability factors. The objective is to encourage asset managers to provide investors with the information that enables transparent and informed investment decision-making. The addressees of the Regulation are regulated entities such as AIFMs and UCITS management companies, banks and financial services institutions. Even if asset managers do not manufacture or distribute sustainable financial products, some of the disclosure requirements must be observed.
How exactly can and must sustainability risks and factors be published?
Glander: The information to be disclosed can be systematically divided into product-related and company-related obligations. Asset managers are required to publish company-related information on their websites. This includes, inter alia, information on their strategies for integrating sustainability risks in investment decisions and in investment advice. Moreover, if adverse effects on sustainability factors are considered in the investment decision or during the investment advisory process, asset managers must generally publish a statement on how to deal with these effects. However, this does not apply to companies which are within the scope of the Regulation and regularly employ less than 500 people. In addition, asset managers must disclose to what extent their remuneration policy is consistent with the inclusion of sustainability risks.
At which point of time does the obligation to inform about sustainability risks begin?
Glander: In future, pre-contractual information of financial products must contain sustainability-related information. Before providing the services, investment advice and portfolio management, investors must be informed accordingly. The scope of this product-related information expands when a financial product is intended to promotes ESG characteristics or if a sustainable investment shall qualify as an “impact investment”. In addition, the European Taxonomy Regulation, which has not yet come into force, will supplement the information to be published with regard to a part of the disclosure requirements.
What influence do the new obligations have on asset managers’ investment decision and advisory processes?
Glander: The Disclosure Regulation is an essential part of the EU’s strategy to redirect private capital into sustainable investments in order to finance the achievement of its climate protection targets. As a result of the new obligations, affected companies will have to make their investment decision-making and advisory processes more transparent for investors. This is especially true for asset managers which have not yet taken into account sustainability factors or sustainability risks in their services and products. They will now be forced to deal with this issue within the framework of their business model.
What are the liability risks arising from the Disclosure Regulation for Asset Managers?
Glander: Violation of disclosure requirements may indeed lead to civil liability risks. If, for example, the publication of the information to be disclosed is not disclosed or just incorrect, a claim for damages may result against the company which is obliged to disclose. In order to reduce this risk, asset managers need to implement internal measures to ensure that the information to be disclosed is accurate and that their employees are trained in dealing with the new obligations.
What specifically should asset managers do now to fulfill their obligations under the Disclosure Regulation?
Glander: The Disclosure Regulation is applicable to asset managers from 10 March 2021 on and is only specified by Level 2 measures, which must be submitted in the draft by 30 December 2020 at the latest. Many companies required to disclose are currently just starting the implementation of the Disclosure Regulation. However, it’s time to act now. Asset managers must initiate internal processes to implement the regulation if they haven’t done yet. In particular, this includes comprehensive training of all employees with regard to disclosure requirements, but also the adjustment of internal processes for the collection and processing of sustainability-related data. Furthermore, the product range must be analyzed in order to make necessary adjustments in the documentation. First and foremost, decisions have particularly to be made on management level on how to deal with the ESG aspects, e.g. if one “just” prefers to offer ESG as an add-on or to stand up for ESG in the markets.