A guide to EU sustainable finance reforms for asset managers: Bryan Cave Leighton Paisner

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As Europe’s asset management industry readies itself for sweeping reforms to sustainability regulations, leading finance lawyers Matthew Baker, Bernd Geier, and Chris Ormond from international law firm Bryan Cave Leighton Paisner say the reforms hold many exciting opportunities for asset managers.

Read their views below on how to implement the new rules across organisations, the key impacts and timings of the legislation, and the UK’s approach to deepening its sustainable finance strategy.

Environmental, Social and Governance (ESG) has become a megatrend that has emerged quickly, comprehensively and broadly, galvanised by the growing importance of the impact of climate change.

The EU has introduced a package of sustainable finance reforms that affect EU firms and those wanting to do business in the EU. The Disclosure Regulation and Taxonomy Regulation both apply to “financial market participants”, including AIFMs, UCITS ManCos and MiFID investment firms providing portfolio management advice. Because of the scope and application of the proposed rules that surround these two key measures, it is also expected that managers who are (or who manage funds) outside the EU will also need to comply with many of the measures if they wish to market their products to EU investors.

To help achieve smooth implementation of the new rules across their organisations and products, we would highlight a few key action and practical points for asset managers.

  • A scoping exercise: There are greater disclosure and other obligations for those firms that have a sustainability focus as part of their business. This includes firms having to differentiate between their marketing of “Article 8” products (that promote environmental and/or social characteristics) and “Article 9” products (that have a sustainable investment objective). In addition, firms that are categorised as “large” will have to comply earlier than others (in June 2021).
  • A strategic approach: The extent that a firm incorporates ESG into its services will shape its strategy, whilst ensuring that governance, policy and risk issues are taken into account. For example, Article 8 and 9 products that are within scope of the Taxonomy Regulation (ie they contribute substantially to one or more of the Regulation’s 6 Environmental Objectives) will need to make supplemental disclosures, comply with certain safeguards and confirm the “do no significant harm” principle applies to those investments that take into account sustainable economic activities.
  • A holistic approach: Firms will need to integrate other sustainability requirements (as may be prescribed under AIFMD, MiFID II, UCITS Directive, Insurance Distribution Directive and Solvency II) with industry best practices as may be relevant on a sectoral level. For example, MiFID firms are required to integrate sustainability preferences into the product oversight and governance process. Investment advisers and discretionary managers will also be required to ask clients about their ESG preferences during the suitability assessment which is expected to drive greater interest in sustainable products. AIFMs are to ensure that sustainability risks and sustainability factors are integrated within their organisational, operating, risk management and due diligence processes.
  • A resilient approach: The principal rules under the Disclosure Regulation come into effect on 10 March 2021, albeit that the publication of and compliance with the final Level 2 measures has been delayed (with 1 January 2022 being the expected new compliance deadline for the initial set of RTS). This is likely to result in a two-tier approach and having to re-visit disclosures and other obligations once the Level 2 measures are finalised.  Another issue is the impact of Brexit on the UK’s implementation of the Disclosure Regulation. Although there is no 10 March 2021 deadline for UK firms carrying on business in the UK, if a firm is conducting business on a cross-border basis after the Disclosure Regulation comes into force (March 2021), then it will need to consider its obligations.

The table below sets out the broad application and key impacts of the primary EU legislative package (we have not included any details on the proposed delegated acts that integrate sustainability requirements into other directives). 

EU legislation Timing Key impact Operational issues/action points

Disclosure Regulation  (EU) 2019/2088

Consultation on Level 2 measures closed on 1 September 2020 (note there is a delay to these being finalised and implemented)

The main provisions will apply from 10 March 2021

From 30 June 2021 asset managers with over 500 employees (or that are the parent of a group that has) will have to publish their DD policies with respect to the principal adverse impacts of investment decisions on sustainability factors

Firms will be required to integrate sustainability risks into their operating models, provide more detailed disclosures on ESG policies and sustainability risks and increase due diligence on the ESG profile of funds. 

This involves “comply or explain” decisions in relation to publishing and maintaining sustainability factors/risks for DD policies and products made available.

Ensure necessary resources and expertise. Note some disclosures apply regardless of whether or not a fund has an ESG investment focus.

Consider approach to be taken for “comply or explain” decisions.

Prepare/update policies eg on sustainability risk and remuneration. 

Consider SMCR implications (control and supervision).

Taxonomy Regulation (EU) 2020/852

Consultation on the first set of Level 2 measures (technical screening criteria for climate change mitigation and adaptation) closed on 18 December 2020

The main provisions will apply from 2022 with regard to 2 environmental objectives.

All other environmental objectives will apply from 2023 onwards.

Establishes an EU-wide classification system or taxonomy of environmentally sustainable activities. Assessment against 6 environmental objectives eg climate change mitigation.

Imposes supplemental disclosure obligations on fund managers eg a statement of whether or not a financial product has an environmental-sustainable investment objective (and if so, to what extent the criteria are met). Required updates to pre-contractual documentation and periodic reports for ESG-focused products.

Main impact on firms where products made available have an environmentally sustainable investment objective, or promotes environmental characteristics. However, all managers will at least need to make a negative disclosure to confirm that all out-of-scope financial products are out of scope.

Start to prepare additional disclosures/update documentation for those funds and accounts in scope.


We expect the current Covid-19 crisis to increase the urgency of issues that need to be addressed, and bring a renewed focus on social and governance issues – for instance, in terms of how businesses treat their employees, suppliers and interact with their communities, as well as recovery funding being linked to achieving social good. 

The UK's approach

Nikhil Rathi, the FCA’s CEO, spoke at a Green Horizon Summit in November 2020 about the FCA deepening its sustainable finance strategy in order to drive best practice and support the transition to net zero, and the importance of collaboration with other regulators, the Government and industry to achieve this. We would draw out three themes which provide useful markers for the UK’s expected approach in this area.

First, the FCA has extended and accelerated its plans to introduce mandatory climate-related financial disclosure requirements for listed issuers and large asset owners that are aligned to the Taskforce on Climate-related Financial Disclosures’ (TCFD) recommendations. For asset managers, along with life insurers and FCA-regulated pension providers in the UK, the FCA intends to consult in the first half of 2021 on proposed new disclosure rules. The TCFD’s Taskforce Roadmap expects 75 per cent of asset managers to be covered by the regulatory/legislative requirements for TCFD reporting in 2022, increasing to 96 per cent by 2023.

Secondly, the Government has announced its own UK taxonomy for determining which activities can be defined as environmentally sustainable, and that this will take the scientific metrics in the EU taxonomy as its basis.

Thirdly, whist referring to “interactions with related international initiatives, including those that derive from the EU’s Sustainable Finance Action Plan” one could easily infer that the UK has more ambitious regulatory and industry objectives than the EU in this space.


Our view is that these ESG developments provide an exciting opportunity for asset managers across all asset classes and sectors – whose actions can unlock investment opportunities and have tangible effects on economic prosperity and the health and wellbeing of stakeholders. Whilst not without challenge, embracing sustainable investment best practices, alongside implementation of the regulatory initiatives, will help drive scrutiny of investment products and avoid potentially problematic commercial and regulatory consequences of greenwashing and misleading product labelling.

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