Environmental, Social, and Corporate Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk).
In June 2020, the European Commission published draft legislation to incorporate ESG considerations into the UCITS Directive, AIFMD and MiFID.
Under the regime, fund managers must incorporate sustainability considerations into their risk management processes, including due diligence on prospective investments.
The European Union’s new Sustainable Finance Disclosure Regulation (SFDR) also comes into effect in March 2021 and given the UK's concerns around maintaining regulatory equivalence in a post-Brexit environment and asset managers keen for consistency across the different local markets in this area of regulation, the FCA has indicated that it will seek to mirror the European initiatives by implementing the rules and making the required changes to the Conduct of Business Sourcebook (COBS).
The core parts of the new ESG regime are:
Firms will need to assess each fund and managed account which they make available to determine if it is in scope of the enhanced disclosures for products with an ESG focus.
At the moment monitoring and planning accordingly is key and Thompson Taraz will continue to review any future requirements.