ESG Investing

New ESG Disclosure Law in EU Points the Way for US


The United States appears on course to adopt new European-type ESG disclosure and impact measurement standards as the Biden administration forges ahead with its ambitious agenda to combat climate change.

On March 10, the European Union enacted the first part of its Sustainable Finance Disclosure Regulation (SFDR). This requires investment firms to provide standardized disclosures on how they integrate environmental, social, and governance factors at both an entity and product level. It forms part of the EU’s overarching goal to push capital toward sustainable investment as well as provides a theoretical guide of what to expect from the Biden administration on financial disclosure, given the latter’s ESG support.

Pursuing Alignment with Sustainability Goals

The SFDR seeks to ensure that investors have the information they need to make effective investment choices that align with their sustainability goals. New disclosure rules are intended to eliminate greenwashing, which can mislead investors about the environmental credentials of investment products. The SFDR stipulates sustainability disclosure obligations in the investment process and financial products that claim to pursue sustainable investment objectives.

EU legislators added further disclosure obligations relating to adverse environmental and social impacts following investments in businesses that do harm, including major polluters. This action forces investment strategies that do not pursue sustainable mandates to make ESG disclosures.

Although disclosing adverse impacts under the SFDR at the entity level already applies on a comply-or-explain basis, asset managers and advisors will need to provide more detailed information in the form of adverse impact statements starting next year. Along with European firms, the rules also apply to US asset managers marketing funds to EU clients.

The ESG Disclosure Simplification Act opens the way to more widely harmonize standards.

Assessing US Progress on ESG Disclosure

The US currently appears behind the EU on ESG disclosure; yet it has a chance to catch up quickly as the EU irons out some of the finer details of its own regulation.

President Biden issued the Executive Order on Climate-Related Financial Risk in May, directing federal agencies to take wide-ranging actions related to such risks. The House of Representatives narrowly passed the ESG Disclosure Simplification Act last month, requiring the US Securities and Exchange Commission to lay down rules on the disclosure of ESG metrics by public companies and set up a Sustainable Finance Advisory Committee. Beyond advising on which ESG metrics are to be disclosed, this committee will consider policy changes meant to encourage the flow of capital to sustainable investments.

US firms marketing investment products in the EU already have to follow the EU’s ESG disclosure rules in their communications with European clients. However, the ESG Disclosure Simplification Act opens the way to more widely harmonize standards. This could also speed up the creation of ESG disclosure rules in the US by default, as stakeholders and regulators can draw from the European blueprint. The Act states that the SEC may “incorporate any internationally recognized, independent, multi-stakeholder environmental, social, and governance disclosure standards.”

Given their significant operations in Europe and their corresponding but compulsory adoption of the EU’s disclosure rules, some of the larger US investment managers may even be keen to replicate the EU standards in the US. Complications could still arise: the EU is itself still in the process of making final touches to ESG disclosure standards, so at least a small degree of regulatory divergence seems inevitable. SEC Chair Gary Gensler has indicated that the SEC is on course to propose US ESG disclosure rules.


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