Legal Considerations in Responsible Investment

EU Agrees on New Requirements Regarding Sustainable Investments and Sustainability Risk Disclosures

On March 7, 2019, the European Parliament and European Union countries agreed on new rules on the disclosure and transparency requirements for sustainable investments made by asset managers. The rules require money managers, insurance companies, pension funds and investment advisers to integrate environmental, social and governance (“ESG”) factors into their portfolios, to report ESG risks and opportunities as part of their fiduciary duty, and to include a transparency framework so end-investors can better understand how asset managers take sustainability factors into account.

The European Commission first proposed the agreement in May 2018, as part of the EU’s sustainable development agenda and the carbon neutrality agenda. The agreement introduces consistent transparency requirements across various financial services sectors designed to eliminate “greenwashing,” which occurs when investment firms make unsubstantiated or misleading claims about the sustainability focus of products they offer investors, and to reduce information asymmetries on sustainability issues between financial advisors and investors.

In announcing the agreement, the Commission noted that the availability of information is crucial to integrating risks related to the impact of ESG events on the value of investments, such as to assets located in flood-prone areas, as well as the disclosure of adverse impact on ESG matters, such as in assets that pollute water or devastate bio-diversity, to ensure the sustainability of investments.

The Commission did not announce when the rules will go into effect.

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