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ESG – The roadmap for investment firms and asset managers

Our partner Mika Lehtimäki discusses in the post the general structure of the European Union ESG legislation. This is the first post in the series and the main areas of law and our insight on these matters will be covered in the following posts.


We have evidenced the emergence and implementation of numerous environmental, social and governance regulations and guidance by the EU this year. Navigating this extensive package is difficult even for the companies having the most resources dedicated to compliance. One reason for the difficulties is that a number of critical parts of the rules have not yet been even adopted despite the looming next deadlines in 2021.

ESG – The roadmap for companies and asset managers

We are following these developments closely at TRUST. Because a number of our clients have requested this, we will be setting up a roadmap for ESG compliance and advisory. Our finance team will cover during 2022 a number of practical ESG issues. This enables tackling the more difficult, specific questions more easily – as they arise. Our focus is on asset management companies, but certain parts will be relevant for all companies alike. 

We discuss here the general structure of the regulation. The main areas of law and our insight on these matters will be covered in the following posts.

What is at stake

The underlying point of the EU ESG law is directing finance towards more sustainable investments. The ‘E’, as opposed to ‘S’ and ‘G’ has received the most attention so far. The objective means that companies will need to disclose ESG matters, carry out due diligence on investments throughout the entire investment chain, categorise financial products in a transparent way and set up organisational structures to support this. The on-coming Sustainable Corporate Governance Initiative (the directive proposal is expected by the end of 2021, but more likely early 2022) will tackle the latter issues in detail, adding also a new level of management liability in the enforcement regime.

The main building blocks 

The big picture is important. Any other strategy will risk leading to fragmented approach to ESG. E.g. the new chair of the ESMA pointed out in her speech in November 2021 that during the next few years the focus of ESMA in ESG matters will be on monitoring and control of so-called ‘greenwashing’. For example, lack of due diligence on supply chains and analysis of the actual sustainability impact and effects may lead, in addition to compliance failure, to damages liability and administrative sanctions. Assumptions are not sufficient to trump liability. What is more difficult, however, is that some of the relevant rules and interpretations remain yet to be published.

Taxonomy – where it all begins

First, there is the EU classification system – so-called taxonomy – for sustainable activities. The important practical categorisations have been under extensive political discussion during 2021. A political consensus was reached this December. The central piece of legislation is the Taxonomy Regulation.  The regulation establishes a classification system and provides companies with a common terminology if a particular activity should be considered environmentally sustainable. This is the case where the activity:

  • contributes substantially to any of a series of environmental objectives,
  • doesn’t significantly harm any of the environmental objectives,
  • complies with certain minimum social safeguards, and
  • complies with specified technical screening criteria.

The relevant ‘environmental objectives’ are:

  • climate change mitigation,
  • climate change adaptation,
  • sustainable use and protection of water and marine resources,
  • transition to a circular economy,
  • pollution prevention and control, and
  • protection and restoration of biodiversity and ecosystems.

Needless to say, the technical rules of the above requirements are material. We will address these in later posts.

Financial Reporting and Promotion of Investments

Secondly, there is the increasing the transparency of companies on their ESG policies and the products themselves. The central pieces of legislation are the Sustainable Finance Disclosure Regulation (SFDR) the Non-Financial Reporting Directive, and the on-coming new rules Sustainable Corporate Governance Initiative

The three important categories of requirements relevant for investment firms and asset managers in the SFDR are the requirements that the firm must meet: 

  1. on the company level, and
  2. on the level of financial products in all cases.

There are additional transparency and reporting requirements in relation to specific financial products the objective of which is to promote ESG characteristics or investing in sustainable investments.

The most important transparency and governance requirements are:

  • consideration of sustainability risks in decisions and promoting of investments,
  • sustainable investments in activities that contribute to environmental or social goals including EU-taxonomy compliant activities, and
  • consideration of ‘principal adverse impacts’ on sustainability factors (these also include human rights, anti-corruption and anti-bribery aspects).

The SFDR sets forth rules on pre-contractual documents provided to investors and on periodic reporting as well as sets out certain governance requirements relating to investment policy. It should be noted that the SFDR has been supplemented by extensive (final draft) Regulatory Technical Standards that deal with several more detailed questions surrounding the transparency and disclosure obligations.

Integration of obligations into MifiD, UCITS and AIFM rules

The most important pieces of EU legislation applying to financial services companies and various types of funds have been amended to define ‘sustainability factors’ and ‘sustainability risks’ – both referring to the SFDR. Based on these, for example AIFMs must take sustainability factors into account in their due diligence and selection of investments and have written policies detailing the actions and procedures. The same applies to analysis of ‘principal adverse impacts’ and identifying conflicts of interest arising when considering sustainability obligations. 

There will also need to exist sufficient resources for sustainability compliance obligations and the methods will need to be included in the risk management policy. In practice, sustainability requirements are required to be included as a part of all decision-making procedures, training, internal controls, reporting and records. These are specifically intended to apply also to the senior management. All financial services companies, AIFMs and UCITS funds are subject to similar requirements concerning ESG compliance.

Other Notable Rules

Other important pieces of regulation relevant to ESG compliance are the rules on European labels for financial products, e.g. the Green Bond Standard. In addition, the benchmarks of low-carbon and positive carbon impact benchmarks have been set up by the Benchmarks Regulation.

Some Dates to Note in Early 2022

1 January 2022 (Taxonomy)   For any of your products that do not fall within Article 8 or 9 SFDR – Include in pre-contractual disclosures and periodic reports: “The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.”

1 Jan – 30 June 2022 (SFDR)  – (in periodic reports) Include prescribed new disclosures in periodic reports, but in line with the Level 1 SFDR requirements.

1 July 2022 – There are several rules applying as of 1 July 2022 – we will update on these in early 2022.

Originally 1 Jan 2022  – (postponed) Article 9 product or an Article 8 product, and the environmental objective is one or both of the following: (a) climate change mitigation (b) climate change adaptation: commencement of relevant pre-contractual and periodic disclosure requirements and well as ‘principal adverse impacts’ disclosure. The application is delayed (EU Commission information 25 November 2021) from 1 January 2022 and 1 July 2022 to 1 January 2023. We note that due to publication of the final draft RTS in late 2021, it is strongly advised to commence preparation for all the relevant obligations throughout 2022. In practice, firms will need to start gathering relevant data from 1 January 2022 for principal adverse impact analysis.