BRUSSELS: Hedge funds are set to be excluded from a requirement that would force investment managers in Europe to categorise whether their products are environmental, social, and governance (ESG) or not.
The proposal put forward by Cyprus, which holds the European Union’s rotating presidency, recommended that alternative asset managers selling to professional investors be freed from the rules, according to a draft document seen by Bloomberg.
The proposal is part of the European Union’s (EU) overhaul of the Sustainable Finance Disclosure Regulation (SFDR), which since its launch back in 2021 has faced repeated criticism from investors and regulators alike for its failure to prevent greenwashing.
The EU is responding by establishing a more explicit labelling framework that sets strict requirements on ESG funds and limits what managers can say about non-ESG funds.
A spokesperson for the European Council declined to comment.
The European Commission, the EU’s executive branch, first proposed the idea in a draft last year, but subsequently dropped it in final recommendations. The measure, which has some support among EU lawmakers, still needs the final approval of member states and parliament.
The Cypriot proposal marks another victory for the asset management industry in its efforts to keep such regulatory requirements at bay.
There’s a “lingering sense” that SFDR categories “were designed with a long-only investment approach in mind,” said Adam Jacobs-Dean, global head of markets at the Alternative Investment Management Association, whose members include hedge fund giants Millennium Management LLC and Man Group.
Last month, the commission also proposed that asset managers be exempt from having to report ESG data for client assets. A final decision on that has yet to be made.
Settling SFDR soon is important for the industry, said Lily Marcel, co-chair of the global ESG board at Clifford Chance.
“Launching a new closed-ended fund can be a lengthy process”, and a fund manager needs “to be able to disclose clearly to investors the factors that are integrated into its investment process”, she said.
The Cypriot proposal would effectively drop a limit now under consideration on how much non-ESG funds can say about their approach to sustainability.
The opt-out would allow managers to explain their sustainability strategies “without necessarily having to try and shoehorn the product into a product category that might not be a natural fit”, Jacobs-Dean said.
Fund managers may still create ESG labelled funds, depending on the demands of their clients, he said.
“Those that think it’s important for asset raising likely wouldn’t make use of the opt-out in any case because they’ll want to be able to offer categorised products,” he said. — Bloomberg