Back in 2019, the European Union passed something called the Sustainable Finance Disclosure Regulation. Exactly the sort of the thing British membership in the EU had previously kept from happening, the new law does pretty much what it says: requires financial services companies to disclose matters relating to sustainability. And, of course, unsustainability: The legislation includes the “Principal Adverse Impact” rule, requiring firms to list all of the things they do that might not be so great for the environment in any way. As you can imagine, that can be quite a lot of things.
“It’s a very difficult issue,” according to Lucian Firth, an attorney at the London-based law offices of Simmons & Simmons LLP who advises investment managers all over the world. PAI “is one of the most difficult and onerous parts of SFDR….”
“My large clients are concerned about this,” Firth said. “They don’t want to be doing PAI for all of their U.S. business….”
What’s more, they don’t think they should have to. And their lawyers don’t think they should have to, either.
“They want to keep marketing their Cayman hedge funds in Europe, but they don’t want to be forced into doing Principal Adverse Impact disclosures across the whole of their business because that is just too burdensome and they won’t do it,” he said…. “We think it would be dangerous” to do so, “without thinking through the implications,” [Dechert’s Mikhaelle] Schiappacasse said. She points out that non-EU investment firms “will already be disclosing how ESG risks are integrated into the management of the particular project” under existing SFDR rules. “Why and on what basis would such disclosure be required across the investment manager’s non-EU activities?”
Well, Mikhaelle, it seems the answer to your question is, “because we fucking said so.”
European regulators, meanwhile, say there’s little doubt that fund managers outside the bloc are expected to live up to the PAI clause under SFDR, not just for individual investment products marketed to EU clients, but for their entire business.
According to Dan Nacu-Manole, a spokesman for the European Securities and Markets Authority, alternative asset managers based outside the EU are “required to file entity level SFDR disclosures….”
“For me, it’s clear that the requirement applies to both entity and product related requirements,” said Marc-Andre Bechet, deputy director general of the Association of the Luxembourg Fund Industry, which represents Europe’s largest hub for fund managers. “Some people might not be happy about having to comply,” but “it’s not like you pick and choose.”
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