‘We are bracing ourselves for this huge wave of new regulation’

In ESG Clarity Intelligence‘s September e-zine: ESG evolution explained: Unpacking the biggest developments in ESG and sustainable investing, MA Financial editor-in-chief Natalie Kenway talks to Anisha Desor, investment funds lawyer at Linklaters, about regulation and the investment industry.

Watch the full video interview above and read the transcript below.

Anisha Desor: In order to understand this rapid development, we really need to look at the context in which we’re operating. So clearly, we’re in a global climate crisis, and governments really need to take urgent action in order to redirect capital to where it’s most needed.

What I would say is regulation is a really great tool to do this.

Natalie Kenway: Fantastic. Thank you. What would you say have been the key developments in regulation over the past year for the sustainable investment world?

AD: I would say with my particular client base, when the SFDR level 2 came into force on 1 January this year, that was huge.

Suddenly managers who are putting out products which are within the scope of SFDR, so they might promote environmental social characteristics or have a sustainable investment objective, suddenly these managers had to provide these really granular disclosures in terms of what characteristics they are promoting, how they’re going to measure it, how they’re going to obtain data.

So suddenly they are being held to a really high standard of accountability and really having to look behind the disclosures to see can we really test our processes and make sure that this is all really robust and we can we really stand behind everything that we’re saying?

See also: – SFDR explained: What qualifies as Article 9, 8 and 6?

And similarly, it’s been transformative for investors because suddenly they have this huge amount of information and they’re able to really meaningfully compare and contrast different managers because of the standardised nature of these disclosures and really get to the bottom of what’s happening on the ground.

So I would say, from my perspective, when SFDR level 2 came in, it really encouraged that really meaningful discussion between investors and asset managers around ESG.

NK: There have been a lot of frameworks being launched around ESG regulation, but a lot of them at the moment are voluntary. What should fund selectors be looking for when they’re having conversations with asset managers in terms of what they comply with?

AD: A really good question. I think to answer that we need to again take a bit of a step back and acknowledge that when we talk about fund selectors we’re talking about different investors with very different drivers.

So I would say, in my experience, is very much those conversations are influenced by the drivers that affected that particular investor. So that might be, for example, they’re subject to specific regulation, which means that they need to have specific information from their asset managers. It might be that they have certain stakeholders which have ESG objectives that they need to honour, it might be that they have political pressures, for example, which require them to get ESG outcomes.

So that’s been really interesting to see how that sort of develops.

See also: – Jury’s out on funding nature

But in terms of those conversations, what I would say is the most successful conversations that I’ve seen are where the investor has really gone back and thought about what it is that they need and laid it all out on the table as early as possible in the process with their asset manager

But also, as important as explaining what they need is explaining why they need it, because giving that extra bit of context really helps to foster helpful discussion and allow investors and asset managers to really get to an outcome that makes sense for them both.

NK: What would you say are the key pieces of regulation or legislation to look out for in the next year?

AD: There’s a lot, I would say. I mean, we’re kind of bracing ourselves for this huge wave of new regulation and also updates to existing regulation. So, as you might be aware, there are a lot of consultations which are currently ongoing. So we’re waiting for the outcomes.

But, from a UK perspective, I think one thing that I’m particularly interested in is when the sustainability disclosure requirements regime comes in in the UK. There was a consultation paper put out by the FCA in October 2022 and that had a huge response. The plan was to have the sustainability labelling regime, these marketing rules and disclosure rules and anti-greenwashing rule.

And there was such a huge response. I think there were 240 responses. And so it just, it meant that actually the FCA has now gone back and decided that we need a bit more time to consider this.

And I think it’s going to be really interesting because actually the points that they’re really focused on, for example, how is this going to interact with existing regimes, how will this interact with SFDR, for example. How will it apply to multi-asset strategies, how are we going to make sure any marketing rules actually work in practice?

So the FCA has a really great opportunity now to break new ground and it’s very much a wait and see moment.