MANAGERS 27 May 2020 QUESTIONS? Please email: - PowerPoint PPT Presentation

ESG & ASSET MANAGERS 27 May 2020

QUESTIONS? Please email: natalia.hannan@addleshawgoddard.com And we’ll do our best to answer them at the end of the presentation.

AGENDA TODAY ● Defining “ESG” ● ESG related issues asset managers are considering right now ● A brief state of play on the key EU developments ● A shift from the “E” to the “S” and “G” ? ● The Market View ● The Managers’ Perspective ● The Investors’ Perspective ● Questions

ESG – WHAT DO WE MEAN BY THAT? ● E = Environmental factors ● S = Social factors ● G = Governance factors ● “Sustainability” ● Focus on the “ E ” but shift in emphasis post Covid -19?

WHAT ASSET MANAGERS ARE THINKING ABOUT NOW ESG data collection Policy Updates / Amendments to Reputation Management Development Product T&Cs / Fund disclosures ESG Due diligence impact/gap COVID- processes Development of analysis 19 reporting templates Website Regulator focus Disclosures Greenwashing / Existing ESG mislabelling commitments / Brexit side letters

STATE OF PLAY ON KEY EU MEASURES

BROAD REACH OF THE EU’S MEASURES Investment Firm AIFM EU SUSTAINABLE UCITS Management Credit Institution Company FINANCE REFORMS EU business directly Non-EU business impacted directly or indirectly impacted

A QUICK LOOK AT THE KEY PIECES LOW CARBON EU DISCLOSURE EU TAXONOMY BENCHMARKS REGULATION REGULATION REGULATION (L1 Regulation adopted & in (L1 Regulation final but still (L1 adopted & in force but L2 force – material obligations will awaiting EP approval – various L2 measures not yet adopted – apply from March 2021 – ESAs measures still to come) ESMA no action letter – consulting on key L2 measures) application effectively on hold) PRODUCT AIFMD / UCITSD GOVERNANCE & / MIFID II SUITABILITY AMENDMENTS REFORMS (draft proposals - timing tbc) (draft proposals – timing tbc)

ESG – PHASED APPLICATION OF DISCLOSURE OBLIGATIONS ● High level summary March 2021 December 2021 ● Subject to changes Substantive provisions of EU Disclosure Enhanced disclosure obligations apply ● Regulation apply, including: for products that promote "E" Red denotes compliance dates characteristics (only covering "climate “Comply or Explain” ● change" and "climate adaption" RTS = draft L2 measure objectives) (see June 2021 ESA RTS) Entity level • Firm website disclosures and pre- Non-financial reporting obligations contractual disclosures on integration of apply to "Large Public Interest Entities sustainability risks (but only covering "climate change" June 2020 June 2022 • Updated remuneration policy and "climate adaption" objectives) EU Taxonomy Regulation ESA draft RTS due covering: Financial Product Level ESA draft RTS due covering: expected to be formally adopted. • Pre-contractual disclosure on integration • • Enhanced disclosure of sustainability risks (any product) Firms' website disclosures (social • requirements for products that Further pre-contractual disclosures on impacts, including human rights, anti- promote "E" characteristics products promoting “E” or ”S” bribery etc.) (covering the remaining "E" characteristics or having sustainable objectives): investment as objective Commission to publish technical screening • disclosure of the "do not criteria (all remaining "E" objectives). significant harm principle" Review of Marketing Communications • • "Taxonomy alignment" of Communications must not contradict portfolio. information disclosed under EU Disclosure Regulation Jun Dec Mar Jun Dec Jan Jun Dec 2020 2020 2021 2021 2021 2022 2022 2022 December 2020 June 2021 January 2022 December 2022 “Comply or explain” becomes More detailed disclosure and ESA draft RTS due covering: reporting requirements apply on “comply” for financial market Annual Reporting requirements whether/how adverse impacts on • Firms' website disclosures participants with 500+ employees apply. sustainability factors are (climate and other considered at product level (any environmental impacts) ESA draft RTS due covering: • • product) Product pre-contractual and Enhanced disclosure website disclosures for products requirements for products that Enhanced disclosure obligations that promote "E" or "S" promote "E" characteristics apply for requirements for characteristics ( only covering "climate change" • and "climate adaption“ products that promote "E" Annual report disclosures for characteristics (covering the products that promote "E" or "S" objectives) • remaining "E" objectives). See characteristics. disclosure of the "do not June 2022 ESA RTS) significant harm principle" • Commission to publish technical "Taxonomy alignment" of Non-financial reporting screening criteria for climate change portfolio. obligations apply to "Large mitigation and adaption objectives Commission delegated act due to Public Interest Entities“ (covering only). flesh out non-financial reporting remaining "E" objectives) . obligations that will apply to "Large Public Interest Entities"

A SHIFT FROM THE “E” TO THE “S” AND “G” ?

WHAT EXACTLY ARE THE ‘S’ AND ‘G’ IN ESG? E Climate change, pollution, resource depletion … S Modern slavery, working conditions, employee relations … G Bribery and corruption, executive pay, board diversity and structure, political lobbying and donations and tax strategy …

G-FORCE ACCELERATION – THE IMPACT OF COVID-19 .. there is already substantial In the near future – and sooner than most empirical evidence to anticipate – there will be a significant reallocation of suggest that the “G” aspect capital. of ESG ultimately yields Climate risk is investment risk. better corporate returns. Improved Disclosure for Shareholders … should Kelly Tang, S&P Global extend beyond climate to questions around how (March 2019) each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it Companies can still protects its customers’ data. demonstrate that they have effective leadership. In ... we will be increasingly disposed to vote against times of crisis that management and board directors when companies becomes more apparent, are not making sufficient progress on sustainability- not less apparent. related disclosures and the business practices and Michelle Edkins, plans underlying them. BlackRock (March 2020) Larry Fink, CEO Blackrock (January 2020)

PRACTICAL IMPLICATIONS FOR ASSET MANAGERS ●Defining the ‘S’ and ‘G’ ○ Remember – ESG is a marathon not a sprint ○ Better to under promise and to over deliver ○ Look at what peers are doing ● Board engagement ○ Establish cross-functional team – beware of risk concentration in a single function ○Be mindful of the PRA’s guidance for banks and other financial institutions ○ Board should consider on a regular (semi-annual basis) ● Portfolio companies ○ Discussing with management (together with other investors) your ESG obligations/expectations ○ Actively engage by voting on resolutions or proposing specific shareholder resolutions on ESG matters ○ Be aware of potential parental liability for actions of subsidiary portfolio companies

CHANGES TO MIFID, AIFMD, UCITS FRAMEWORKS ● Status : Draft legislative proposals and recommendations • Resources and expertise • Senior management control and Organisational Requirements / supervision – implications for SMCR? • Conflicts Operating Conditions / Risk • Diligence Management • INTEGRATION • Directly impacts any EU distributor • ESG preferences v Target Market? • Close collaboration between product Product Governance distributors and product manufacturers • COLLABORATION • Directly impacts EU advisers; portfolio manager; any EU AIFM with top up permission • Integration of ESG preferences and risks Suitability into suitability assessments • BALANCE

THE MARKET PERSPECTIVE

THE MARKET PERSPECTIVE… Data from KPMG 2019 report “The numbers that are changing the world”

INVESTOR REQUIREMENTS… ESG INVESTING ESG REPORTING ESG GOVERNANCE

THE IMPACT ON MANAGERS… LOOKING INWARDS ALIGNMENT OF EXISTING OBLIGATIONS AND NEW REGULATIONS NEW REQUIREMENTS

QUESTIONS

AG SPEAKERS

AG SPEAKERS LORNA FINLAYSON JONATHAN POWLING RICHARD SMALL JAN GRUTER Partner Partner Partner Legal Director Financial Regulation Investment Management Financial Regulation Investment Management Group Group 0131 222 9579 020 7160 3245 020 7160 3004 0141 574 2327 07980 303483 07809 594258 07889 231898 07784298011 lorna.finlayson jonathan.powling richard.small jan.gruter @addleshawgoddard.com @addleshawgoddard.com @addleshawgoddard.com @addleshawgoddard.com