Friday June 19 2020

News Source: Fund Regulation

Focus: ESG

Type: General

Country: European Union

On 15th June 2020, the German Investment Funds Association (BVI) published the key requirements for ESG reporting. In order to achieve the EU’s goals to promote sustainable investments, the EU requirements for non-financial reporting by companies need to be revised. In future, the requirements of the EU Disclosure Ordinance and Taxonomy Ordinance will apply to asset managers. In order to include ESG factors in their investment decisions and to correctly assess the sustainability risks and opportunities of their investments, the fund companies need comparable and reliable information on the sustainability of the portfolio companies. On the occasion of the EU Commission’s review of the Non-Financial Reporting Directive, the BVI therefore formulated five key demands:

Extend scope of reported information

Reported information should cover all ESG aspects relevant for fund managers, including data on:

  • sustainability risks and opportunities,
  • adverse impact of a company’s activities on sustainability factors,
  • revenues from and CapEx/OpEx in relation to economic activities qualifying as environmentally sustainable in accordance with the Taxonomy.

Create mandatory ESG reporting standards

  • for sustainability risks and opportunities, referring to commonly recognised international standards as the basis for standardised reporting at the EU level.
  • for remaining elements of sustainability reporting (disclosure of adverse impact and Taxonomy-compliant activities) to be subject to future European reporting standards; these standards should be promoted globally in order to close the data gap with regard to non-EU investments.

Align non-financial reporting (NFRD) with sustainability-related disclosure (SFDR) requirements

That applies in particular to the approach to assess and analyse the so-called “adverse impact” of investments upon environment and the society. Asset managers will not be able to properly assess adverse impact of their investments without the corresponding reporting duties being imposed upon companies as originators of such impacts.

Create a central, free-of-charge and readily accessible database for filing of company reports

To ensure a level playing field and facilitate use and processing of high quality ESG data especially for small and mid-sized asset managers, an ESG database should

  • provide “raw” ESG data as reported by the companies,
  • work as one single access point to reports published due to legal obligation, but also on a voluntary basis (e.g. by issuers not covered by the scope of NFRD),
  • allow the information to be machine-readable and downloadable via efficient and secure interfaces.

Extend NFRD requirements to all companies seeking to collect capital via capital markets

The NFRD reporting requirements should apply in essence to all companies seeking to collect capital via capital markets. Bearing in mind proportionality aspects, the scope of NFRD should cover

  • all large companies that seek financing on capital markets by issuance of either listed shares or bonds; the threshold for large undertakings could remain at 500 employees on annual average,
  • all large companies that are established outside the EU, but listed on a regulated market in the EU. This is due to the fact that
    • a significant share of equity assets held by German funds is invested outside the EU (43 per cent for retail, 53 per cent for institutional funds),
    • approximately 30 per cent of European ESG funds accounting for approximately 40 per cent of AuM are global,
    • non-European countries, such as the United States, Japan and Canada, represent more than 70 per cent weight of the MSCI World Index,
    • without disclosure of relevant ESG information by all relevant issuers, many EU fund managers will not be able to comply with their own reporting requirements under those EU frameworks or will face significant expenses for purchasing ESG data from commercial data vendors, representing a burden especially for small and mid-sized asset managers.

Click on the link for further information.