Greening of Europe Means Lots More Red Tape for Investors

Europe’s bankers and traders got plenty of slack from their regulators to weather the pandemic. For money managers, it’s a different story.

The investing industry is facing unprecedented demands from officials in Brussels charged with putting the European Union’s policies to counter climate change into practice. Regulations will soon force asset managers to quantify and disclose how much their holdings degrade the environment -- through carbon emissions, wastewater release and deforestation.

As with its forays into the technology industry, Europe could end up setting a benchmark for everyone. U.S. companies that sell in the bloc, such as Vanguard Group and JPMorgan Chase & Co., would probably also have to abide by the rules.

“They’re essentially setting a global bar for a lot of the industry,” says Andy Howard, global head of sustainable investment at Schroders Plc, a money manager in London that dates back to 1804. “This is happening incredibly quickly.”

In contrast, authorities have loosened bank funding and trading rules in recent months. Lenders were allowed to run at lower levels of capital and won relief from restrictions on leverage to make sure they could keep credit flowing through what could be the worst recession in decades, if not hundreds of years.

The move to force major parts of the $89 trillion asset management industry to report on the “adverse impact” of their investments on the environment is one of the first major pieces of the European Union’s climate-change agenda. The aim is to be the first climate-neutral continent by 2050 and to beat the 2016 Paris accord objective by keeping the temperature increase below 2 degrees celsius.

The EU’s disclosure rules for money managers are part of a package of policies to guide more investment to the climate goals. To achieve net-zero emissions, an additional 175 billion euros ($207 billion) to 290 billion euros per year will need to be invested on new energy and infrastructure systems, according to the EU.

“Investors and stewards of capital have a role in engaging with those companies and potentially participating in capital raises from those companies and in helping finance the transition,” said Deirdre Cooper, co-manager of the Global Environment Fund at Ninety One, formerly Investec Asset Management.

Greening of Europe Means Lots More Red Tape for Investors

The finance world has already tapped into the increasing demand to push back against climate change. The world’s biggest banks, including HSBC Holdings Plc, JPMorgan, Credit Agricole SA and BNP Paribas SA have been racing to issue green bonds for wind farms, battery technology and other renewable energies.

The second quarter of 2020, the height of the pandemic, marked a record for ESG funds, which focus on promoting environmental, social and governance issues. Investors poured in more than $71 billion; $61 billion of that was in Europe. More than $1 trillion was invested in ESG and sustainable assets at the end of June, according to Morningstar data.

Lawyers and lobbyists from around the world are now scrutinizing the proposed disclosure requirements before a Sept. 1 deadline for feedback in a final effort to shape the rules before they start next year.

They’re likely to push back on the mandated “principal adverse impacts statement.”

While France already requires significant disclosures, the EU blueprint applies to many more funds and would probably require fund managers to collect much more granular information than companies provide.

Such mandates will cost money managers about 1.6 billion euros in the five years through 2024, according to Opimas, a Boston-based consulting firm; about 430 million euros would be spent next year. Firms will probably have to purchase data and technology and also add staff, Opimas forecasts.

Among 32 data points the draft rules require money managers to collect and report: the carbon footprint of investments; the non-renewable energy consumption in gigawatt-hours of the investments on a weighted average; total amount in cubic meters of untreated waste water discharged by companies; and the share of investments that affect threatened species. Additional metrics could also be encouraged about land degradation and water recycling.

“When I read that consultation I sat down and took a deep breath,” Vanessa Havard-Williams, partner and global head of the environment and climate change practice at Linklaters in London, said in an interview. “When we talk with clients it often takes several conversations before the implications of the regime sink in.”

©2020 Bloomberg L.P.

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