Arun Srivastava of Paul Hastings

There is currently significant interest in ESG and sustainable investing. The UK Government is pivoting further towards the greening of the UK economy.

In his recent Financial Services Statement, Chancellor Rishi Sunak committed the UK to extending is leadership in green finance.

This statement was accompanied by important announcements around sustainable finance, including Government plans to issue green bonds and to impose mandatory obligations on asset managers and advisers in relation to climate related disclosures.

Asset managers, investors and financial advisors alike will need to focus their efforts in this area - the green movement isn't going away anytime soon.

On the contrary, it is clear that firms will need to embed ESG principles into the fabric of their governance structures and their investment and advisory processes.

Climate policy formed a fundamental part of the US election and will likely play an increasing role in how the UK interacts with both the EU and the US, especially as the UK emerges into the post-Brexit world.

The reboot of the UK Government has injected increased energy into ESG initiatives in the UK. However, 2021 has for some time been pencilled into the regulatory calendar as a year of change for ESG.

In March 2021, the EU's Disclosure Regulation will come into force, with the EU's Taxonomy Regulation following in 2022. These new rules will address the current vacuum in which there are no mandatory provisions relating to ESG compliance.

This often means that investors are unable to verify whether a fund or investment service is in fact operating in a manner consistent with ESG principles, leading to concerns about the practice of greenwashing that permits products and services to be held out as ESG compliant when they are not.

The new rules will impose obligations to make disclosures to investors of ESG processes, and also to require the screening of investments for ESG compliance purposes.

Firms already have a huge incentive to adopt ESG requirements, given that the demand for ESG compliant products is increasing. This is clearly demonstrated when comparing the value of ESG funds in 2020 to 2019 - with ESG funds from this year attracting three or four times the value of funds in 2019.

ESG investing certainly appears to have captured the current zeitgeist, and these new regulations will only increase this further.

To date, international efforts around climate change and ESG issues have produced various recommendations and guidance, which have all been in the form of soft law, which is non-binding.

This will change rapidly and remarkably over the coming months and years as mandatory legal obligations come into force. These requirements are targeted at requiring firms to build consideration of ESG issues into their investment and advisory processes, and to provide clients and investors with consistent and reliable disclosures of ESG issues in their products and services.

While this will create new burdens, sustainable investing is also good from the perspective of attracting investor funds, as mentioned above, and in preserving investor value.

Climate change creates major risks, including physical risks, as well as those posed by the transition to a low carbon economy, which will undoubtedly be disruptive to revenues and asset values. Investors need to take these risks into account in allocating capital and pricing risks.

See the original post:

ESG disclosure regulations: What do investors need to know? - Investment Week