ESMA and NCAs to Assess Disclosures and Sustainability Risks in the Investment Fund Sector
On the fifth of September, 2023, which falls on a Tuesday
The European Securities and Markets Authority (ESMA), together with National Competent Authorities (NCAs), initiated the Common Supervisory Action (CSA) on July 6, 2023. This action aims to evaluate the adherence of monitored asset managers to different regulations and measures concerning sustainable finance.
The main goal of the CSA is to make sure that asset managers who work in the European Union follow the appropriate rules mentioned in the Sustainable Finance Disclosure Regulation (SFDR), the Taxonomy Regulation, and relevant "Level 2 measures." These measures also include those found in the implementation acts of Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Fund Managers Directive (AIFMD) regarding the incorporation of sustainability risks.
The CSA has multiple goals in mind:
The CSA is presently in progress, commencing on July 6, 2023, and extending until September 2024.
Evaluating the Situation: Asset managers operating in the European Union should be ready for increased scrutiny of their disclosures and risk practices relating to sustainability. The CSA's emphasis on complying with the SFDR, Taxonomy Regulation, and other related measures highlights the importance of accurately and transparently communicating environmental, social, and governance factors to investors. Asset managers should also be aware of the risk of misleading investors with false sustainability claims and should take proactive steps to ensure the accuracy and authenticity of their claims. European financial regulators are giving more attention to the issue of misleading claims. In recent progress reports, regulators have defined and described the risks and impacts of misleading claims, as well as proposed ways to mitigate these risks and the challenges they present to different industries. However, the European Commission has rejected the suggestion to establish minimum environmental standards for Article 8 or Article 9 funds under the SFDR because it is primarily a disclosure regime and does not set minimum requirements for sustainable investment parameters, such as "do no significant harm" and governance indicators. We have also previously reported on asset managers downgrading ESG funds due to a lack of guidance on differentiating Article 8 from Article 9 funds based on existing regulatory announcements. All of this means that guidance and market practices in this area are still uncertain and are likely to remain unsettled for the foreseeable future.
© Copyright 2023 Cadwalader, Wickersham & Taft LLP National Law Review, Edition XIII, Issue 248
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Duncan Grieve works as a member of the White Collar Defense and Investigations Group at Cadwalader. He is based in the London office.
Duncan provides guidance to various companies, including large global corporations, on internal inquiries within the organization. He also assists them when they face investigations or legal actions from regulatory authorities such as the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA), the U.S. Department of Justice (DOJ), and the U.S. Securities and Exchange Commission (SEC). Duncan has expertise in handling investigations with international dimensions, specifically those concerning matters in foreign countries like Brazil.
Sharon Takhar serves as a legal professional at Cadwalader's London branch, specializing in Global Litigation and the defense and investigation of White Collar cases.
