ESG and Investment Managers

A Subcommittee of the SEC Investor Advisory Committee has issued a recommendation[1] relating to ESG disclosures for issuers, and this was a focus at the Asset Management Advisory Committee on May 27. Not only did they raise environmental, social and corporate governance (“ESG”) concerns with respect to funds, but they also raised whether the asset managers should have to comply with, and make disclosures with, respect to ESG requirements.

The Committee concluded in the meeting that they expect to develop recommendations based on their assessments and the members’ feedback by the end of 2020. The Subcommittee has spoken previously with a number of asset managers, among others, and has found that “investors consider certain ESG information material to their investment and voting decisions, regardless of whether their investment mandates include an ‘ESG-specific’ strategy.” Of particular interest to fund managers, the Subcommittee noted that “by the end of 2019, over 2,300 global asset owners and asset managers representing close to $80 trillion had signed the UN Principles for Responsible Investment committing to incorporate ESG issues into their investment analysis and decision-making investment processes.” The asset managers that are now placing an emphasis on ESG include some of the global leaders in the space: following the open letter by BlackRock’s Chairman and CEO, Larry Fink[2], in which he focused on climate change, BlackRock has publicly made sustainability BlackRock’s new standard for investing[3]. Ultimately, the Subcommittee of the SEC Investor Advisory Committee recommended, among other things, that the United States “take the lead” on disclosure of material ESG information.

Although there have been attacks on the Subcommittee’s proposal, including related to the meaning of ESG, the different rating systems, the need for standardization, whether environmental, social, and governance concerns should be grouped, the range of materiality, and the notion that this be a requirement, this has been an area of increasing focus for asset managers and investors alike over the years.

The European Commission has been very focused on introducing measures to clarify asset managers’ obligations regarding sustainability for years, as described in their action plan from March 2018[4]. As set forth in their overview[5], “sustainable finance is a work stream aimed at supporting the European Green Deal[6] by channeling private investment to the transition to a climate-neutral economy, as a complement to public money.” A number of the European reforms will have an impact on the operations of non-EU managers, including U.S. managers. For example, under the Sustainability-Related Disclosure Regulation[7], starting in March 2021, a U.S. manager marketing its fund in the EU or sub-advising a UCIT will need to make disclosures on how it integrates sustainability risks and factors into its investment activities.

Additionally, to comply with the MiFID II product governance rules, EU distributors of non-EU managers’ fund interests (including interests in funds of U.S. managers) will require information from the managers on the ESG “profile” of their fund interests, to enable the distributors to identify whether the distributors are distributing those interests in line with the ESG preferences of the target investor market. EU-authorized asset managers will also need to ensure full compliance with the ESG-related disclosure requirements set out in the Sustainability-Related Disclosure Regulation. As noted above, many of the requirements of the Sustainability-Related Disclosure Regulation will not apply until March 2021, i.e., after the end of the currently scheduled transition period during which EU-derived regulations continue to apply in the UK. Whether the Sustainability-Related Disclosure Regulation will continue to apply in the UK after the transition period is unclear. As of June 1, the UK Government published a draft version of a statutory instrument incorporating the Sustainability-Related Disclosure Regulation into UK domestic law. However, given this is still in draft form and taking into account the ongoing COVID-19 pandemic, it is uncertain if and when this instrument will be passed.

Impact investing, and relatedly ESG, have been areas of focus for MoFo for over a decade[8]. We advise some of the largest asset managers and corporations on impact investing, including advising companies on corporate forms and structuring transactions to help ensure impact. Contact us for advice on how to implement ESG-related rules and best practice guidance.

[1] See https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf

[2] See https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

[3] See https://www.blackrock.com/corporate/investor-relations/blackrock-client-letter

[4] See https://ec.europa.eu/info/publications/180308-action-plan-sustainable-growth_en

[5] See https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance_en

[6] See https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en

[7] See https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R2088&from=EN

[8] See https://www.mofo.com/special-content/impact-investing/