New AIFM disclosure requirements on ESG and sustainability

The EU is adopting a package of measures to regulate sustainable finance:

• the Disclosure Regulation (Regulation (EU) 2019/2088) entered into force in December 2019 and will integrate environmental, social and governance (ESG) considerations into the investment decision-making or advisory processes of AIFMs and UCITS management companies;
• the Low Carbon Benchmark Regulation (Regulation (EU) 2019/2089 amending Regulation (EU) 2016/1011) also came into force in December 2019 and will amend the Benchmarks Regulation; and
• the proposed Taxonomy Regulation (2018/0178(COD)) is expected to come into force in 2020 and aims to establish an EU-wide classification system or taxonomy of environmentally sustainable activities.

These form part of the Commission's initiative on sustainable development to put ESG considerations at the heart of the financial system, as set out in its Action Plan on Financing Sustainable Growth published in March 2018.

The Disclosure Regulation

The Disclosure Regulation regulates AIFMs and its main provisions will come into effect in March 2021. The intention is to create a harmonised transparency regime to provide investors with a uniform standard to compare financial products for their ESG risks and sustainable investment objectives. The Disclosure Regulation seeks to achieve more transparency regarding how financial market participants (such as AIFMs) integrate sustainability risks into their investment decisions and/or advice. AIFMs will need to:

1. publish on their websites information about their policies on the integration of sustainability risks in their investment decision-making process;
2. disclose the manner in which sustainability risks are integrated into their investment decisions (to be disclosed as part of the disclosures made under Article 23 of the AIFMD);
3. disclose the likely impact of sustainability risks on financial returns of the fund (as part of the Article 23 disclosures); and
4. where the financial product promotes environmental or social characteristics, the disclosures under limbs (2) and (3) above must include information on how those characteristics are met and if an index has been designated as a reference benchmark, information on whether and how this index is consistent with those characteristics.

By 30 December 2020 ESMA is required to develop regulatory technical standards setting out how these disclosures should be made (in terms of presentation and content). This will give AIFMs only three months to work out how to comply with the Disclosure Regulation.