Citi says asset managers should start preparing for the introduction of new EU ESG disclosure rules coming in March.

In a new report, the bank says the new ESG framework will include enhanced ESG disclosures for all asset managers and funds, new low-carbon and positive carbon impact benchmarks, and an official taxonomy to categorize environmentally sustainable economic activity among others. Even without the timing and sequencing issues, the sheer volume of data needed for the ESG disclosure rules represent a significant challenge for the industry.

Sean Tuffy, Head of Regulatory Intelligence at Citi Securities Services says, “In effect, the EU ESG disclosures could end up becoming a firm’s de facto global standard. This would be similar to what we’ve seen with other recent EU regulations, like research unbundling.”

Summary of the proposed new EU ESG disclosure rules:

• Rather than a single ESG directive, the new rules are a series of updates to existing EU financial regulations.

• The new ESG framework will include enhanced ESG disclosures for all asset managers and funds, new low-carbon and positive carbon impact benchmarks, and an official taxonomy to categorize environmentally sustainable economic activity among others.

• The ESG disclosure rules will apply to all asset managers, regardless of whether they have an ESG strategy.

Entity-Level Disclosures
• Require asset managers to publicly disclose on their website how their investments have an adverse impact on the environment and society using a prescribed template.

• Managers with over 500 employees must comply with the rules, while managers with less than 500 employees have the option to comply; however, if they chose not to, they will have to explain why.

• When calculating the adverse impact of their investments, an asset manager will have to aggregate all of its investments against a set of 32 factors such as, carbon emissions, impact on biodiversity, gender pay gap, and the human rights policies of the companies in which they invest.

Industry concerns
• Some consider the breadth and depth of the entity-level disclosure to be so large that it will be nearly impossible for managers to provide the level of detail required.

• With no standardization, ESG data is already spotty at best, and the entity-level disclosures go above and beyond normal ESG data.

Product-Level Disclosures
• At the product level, managers will need to disclose the sustainability characteristics or objectives of the funds in their pre-sale and periodic documentation.

• These rules apply to both Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Fund Managers Directive funds. The proposals provide details on how this disclosure should be done, along with additional disclosures for funds that have designated an index as a reference benchmark.

• While the product-level disclosures are more familiar to firms, they are not without their challenges.

• “One underappreciated element of the new ESG disclosures is the potential extraterritorial impact,” says Sean Tuffy, Head of Regulatory Intelligence at Citi Securities Services.

• For example, US asset managers often offer UCITS funds that are copies of their US funds.

• The presence of an ESG disclosure on the European version of a fund may prompt questions from their US investors.

• The same issue applies to the entity level disclosures.

• “In effect, the EU ESG disclosures could end up becoming a firm’s de facto global standard,” says Tuffy. “This would be similar to what we’ve seen with other recent EU regulations, like research unbundling.”

• Given this, non-EU firms that are in-scope of the ESG disclosures might want to take a holistic view and consider how this may impact their global business.

Ready or Not
• Even without the timing and sequencing issues, the sheer volume of data needed for the ESG disclosure rules represent a significant challenge for the industry.

• Firms might want to start preparing their data infrastructure to be able to intake the necessary information and produce the reports in the prescribed formats to meet the deadline, even though the rules aren’t finalized.

• “The ESG disclosure requirements underscore the importance of having a holistic approach to regulatory reporting processes,” says Fiona Horsewill, Head of Digital and Data at Citi Securities Services. “Firms that take a strategic approach to their data management are better positioned to address the evolving regulatory environment.”