Sustainable investment management in the European Union

Abstract

The aim of this article is to provide a coherent discussion of the main European sustainability rules that must be observed by individual asset managers and investment fund managers (collectively referred to below as asset managers). The recent proposals to weaken or in any event simplify European sustainability rules are also discussed. First, the author deals with the European sustainability rules with which asset managers must comply in so far as they relate to the relationship with external parties (clients, other investors and members of the general public): (i) providing sustainability transparency under (a) the Sustainable Finance Disclosure Regulation (SFDR), (b) the ESMA Guidelines on Funds’ Names, (c) the Corporate Sustainability Reporting Directive (CSRD), (d) the Taxonomy Regulation and (e) the Corporate Sustainability Due Diligence Directive (CSDDD); (ii) inquiring about client sustainability preferences under (a) the Markets in Financial Instruments Directive II (MiFID II) and (b) the European Long Term Investment Fund (ELTIF) Regulation. Secondly, the author considers the internally focused sustainability rules, that is those that explicitly or implicitly impose requirements on the internal operations of asset managers: (i) the due diligence obligations under (a) the CSDDD, (b) the SFDR, (c) the Taxonomy Regulation and (d) the CSRD; (ii) the obligation to prepare, update and implement a climate transition plan under the CSDDD and the CSRD; (iii) the obligation to integrate sustainability risks into their policies, for example their remuneration policies, their product governance, and their investment policies. The author concludes that the EU sustainability rules with which asset managers must comply are extremely complex and not infrequently unclear, creating practical application problems, legal uncertainty, and high compliance costs. The sustainability transparency provisions are so detailed and complex that retail investors struggle to understand them. Despite the EU’s introduction of all new sustainability rules, reports of greenwashing have proved persistent. For all these reasons, it is doubtful whether the EU sustainability rules will make a sufficient contribution to the transition to a more sustainable world. Finally, it is clear that sustainability thinking in Europe is currently undergoing a transformation. At present, the European Commission is trying to lighten the burden on European businesses by weakening or in any event simplifying EU sustainability rules in order to enhance Europe’s competitiveness.