This week the European Union outlined the world’s first comprehensive green-financing guidelines to regulate finance-industry claims in the thriving area of environmentally sustainable investment AKA esg products. While the rules will apply only in the EU, they could have a broad effect due to Europe’s large financial markets and leadership in the sector.
Lancelot King, counsel in the Investment Management Group at Seward & Kissel LLP, sheds a light on the significance of these guidelines, and how they could impact the regulation of ESG funds in the U.S. Lance’s practice focuses on a broad range of regulatory, compliance, and transactional matters affecting investment companies and registered investment advisers, with a specialty in ESG funds.
New guidelines on ESG products
The EU initiative certainly can provide guidance to US regulators and the financial industry in recommending or establishing a labeling system for “green” investments. While the initiative may not have an immediate effect on regulators, given that there is more work to be done and the impact will not be apparent for some time, the initiative could otherwise have some more immediate effects with respect to the ESG discussion in the US, given the EU’s leading role in this space.
At this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More
In addition to increasing attention on sustainable investing and potentially fueling growth into sustainable investments and ESG products, the initiative may enhance credibility for investing in ESG products, to the extent it contributes to the standardization of what is considered a “green” investment. One broad criticism of sustainable investing is that there is no agreement on a common meaning. To the extent the EU initiative is successful in helping to standardize the meaning of “green” investments and promote industry growth, it could magnify calls for the SEC to address disclosure standards for ESG investing.
Depending on how the initiative plays out, it could also have important implications for whether certain energy sources, such as nuclear energy and natural gas, are viewed as “green” or “sustainable,” in particular by retail investors. While US investment managers have broad flexibility in defining ESG products, they may be more reluctant to include specific investments or categories of investments in a “green” or “sustainable” product that does not meet the EU “green” labeling standard. The initiative might also inform the development of criteria used for benchmarks relating to sustainable investments.