Responsible Investing and Sustainable Finance: What you need to know for starting into 2021

Amery Gülker, Marc Göbbels

It is already crystal clear that 2021 is going to be a very exciting year for the development of responsible investing and sustainable finance. This means that investors and asset managers should make a serious effort now to adapt their respective strategy. As the year kicks off, some key milestones are approaching fast. Please keep note of the following dates in Q1 to stay ahead of developments, in particular around PRI Reporting and the EU Sustainable Finance Disclosure Regulation:

January 4 to March 31 – Revised UN-PRI Reporting

The same procedure as every year: PRI signatories are called to send-in their responses to the PRI questionnaire between beginning of January and end of March. This year, reporting looks somewhat different however. Following an intensive review period that started in 2018, PRI has revamped its reporting framework. Besides more obvious modifications such as the rephrasing of indicators and the restructuring of the reporting modules, there are three underlying changes that you should be aware of:

  • Reporting will broaden its scope: While in the past PRI reporting largely focused on ESG-specific products, the new framework will put more emphasis on the individual approach to ESG throughout its entire investment process.
  • Grading will become more challenging: To account for the increased level of sophistication within responsible investment, PRI has announced to make grading more challenging. To underline that grades from 2021 are incomparable with grades from previous years, the grading scale will change from a letter-based system (A+ to E) to a number-based system (1 to 5 stars).
  • Answers to climate-related (TCFD-based) indicators will become publicly available: After introducing mandatory-to-answer TCFD-based indicators in 2020, PRI is increasing its support to the TCFD framework by making the signatories’ answers to these indicators available within the 2021 public reports. While 2021 reporting will only disclose answers to indicators relating to the TCFD’s core elements Governance and Strategy, PRI plans to expand disclosure to the two remaining core Elements Risk Management, and Metrics and Targets in 2022.

 

March 10 -  EU Sustainable Finance Disclosure Regulation enters into force

March marks the advent of large parts of the much anticipated EU Sustainable Finance Disclosure Regulation (SFDR), which is a key component of the EU Sustainable Finance Initiative. As the name suggests, the regulation entails increased transparency requirements for Investors offering investment products in the EU regarding sustainability aspects considered in investment decisions.

As of March 10, 2021 investors and asset managers (amongst other financial market participants) will be required to disclose sustainability-related information on their website as well as within pre-contractual information. While the regulatory framework already sets the tone of what is expected from market participants, some key details on how to disclose exactly are currently still being worked out. However, it is anticipated that the Regulatory Technical Standard (RTS) will be issued by the EU in the coming months for more specifics on the how. Watch our blog space or get in touch to stay up to date and meet the disclosure requirements in March.

From Q2 2021 onwards – Additional SFDR Requirements and the EU Taxonomy

Besides mastering the PRI Reporting and SFDR hurdles early in the year, investors also need already to plan ahead. As of January 2022 additional elements of the SFDR will enter into force that require diligent preparation:

Increased sustainability-related disclosure requirements will be expanded to Investor’s periodic reporting.

Within these reports, disclosures should then already follow the infamous EU Taxonomy for the first two (out of six) environmental objectives climate change mitigation and climate change adaptation. The EU Taxonomy is widely regarded as a game changer in defining the sustainability performance of investments. Due to its complexity, it goes without saying that getting ready for the EU Taxonomy presents a challenge on its own and we recommend to start preparing now and to liaise with your investors and investments if you are not already in this process. Although one may opt against disclosing in line with the Taxonomy, it will be then required to give proper reasoning for why it is chosen not to and it is questionable if the market will accept this option in the long-term.

 

In a nutshell, right from the start 2021 brings about challenging developments for investors and asset managers in the responsible investment / sustainable finance space. Starting with preparations now is key to stay on top of it. 

 

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