2019 FinReg Outlook: The Calm Before the Storm

Individually all of the proposed rules present major challenges for asset managers. Taken together, they represent a substantial shift for the industry, affecting everything from firms’ product offerings to operations. If the SEC follows through on its agenda, the industry will be facing a busy few years coming to terms with the implementation. The EU Will Take the Lead on ESG Regulation As part of its sustainable finance action plan, the EU Commission has proposed ESG rules for EU asset managers, pension funds, and insurers. Taking the lead on ESG regulation, the Commission’s proposals include a harmonized taxonomy, mandatory ESG disclosures, and the creation of ESG benchmarks. The proposals have been cautiously welcomed by the industry. Elements such as the taxonomy and benchmarks have the potential to help support the growth of the sector by making it easier for investors to compare the ESG elements of funds. However, there is concern that the mandatory disclosures could become check-the-box exercises. Similar to the recent experience with the MiFID 2 and the GDPR, certain elements of the EU’s ESG rules are likely to become the de facto global standard. Absent an official local standard, many institutional investors may adopt the EU taxonomy and benchmarks in their ESG assessment process. It is common practice for US managers to maintain parallel funds in the US and EU that have the same investment goals and policies. If EU funds are forced to adopt ESG disclosures, for simplicity’s sake, many managers may end up adopting the EU’s ESG disclosures for their parallel US funds. The ESG regulations are being fast tracked by EU policymakers and could be finalized as early as March. Given the potential global reach of the EU’s ESG rules, regardless of where they are based, asset managers should be paying close attention to the ongoing debate. 8   Custody and Fund Services