ESG Regulation – October 2021 | N ° 146 – ESG: regulatory reform on the horizon? | Cadwalader, Wickersham & Taft LLP


With ESG (Environmental, Social and Governance) funds on a dramatic slope, a slope that should continue, it seems inevitable that regulatory reform is looming on the horizon. Europe has led the charge in integrating ESG considerations into its regulatory framework. As we seek to assess what kind of regulatory reform might be right around the corner for us here in the US, particularly in the area of ​​fund financing, it is useful to look at regulatory developments in the EU.

Regulatory reform in the EU

The most relevant EU regulation in this space is the Sustainable Finance Disclosure Regulation (SFDR), which entered into force in March of this year. The SFDR imposes mandatory ESG disclosure obligations on asset managers and other financial market participants, and is a major step in the EU’s efforts to ensure a systematic and transparent approach to sustainability in financial markets, thus preventing greenwashing and ensuring comparability.

As a reminder, the SFDR was introduced by the European Commission at the same time as the regulation on low carbon benchmarks and the taxonomy regulation as part of a set of legislative measures stemming from the action plan of the European Commission on sustainable finance.

According to its official formulation, the SFDR “establishes harmonized rules for financial market players and financial advisers on transparency with regard to the integration of sustainability risks and the consideration of negative impacts on sustainability in their processes. and the provision of sustainability-related information with respect to financial products.

The SFDR has imposed transparency and disclosure requirements on financial market participants and financial advisers such as banks, insurance companies, pension funds and investment firms, both at the entity level and product, aimed at protecting end investors by enabling them to make informed decisions about their investments. These market players and advisers are now required to be transparent about:

(i) their policies on integrating sustainability risks into their investment decision-making and advisory processes;

(ii) how they view the negative impacts of their investments on sustainability (for example, how the products applied by borrowers affect ESG issues);

(iii) the sustainability of their financial products;

(iv) how the promoted environmental or social characteristics are respected (for example, if an index has been designated as a benchmark, information on the consistency of this index with these characteristics); and

(v) when a financial product has the objective of sustainable investment and an index has been designated as a benchmark, information on how the index is aligned with this objective and, if no index has been designated as the benchmark for this goal, an explanation of how this goal is to be achieved.

Disclosure requirements include:

  • What companies should disclose and maintain on their websites;
  • Information that must be provided to investors; and
  • Periodic reporting to investors.

To comply with these obligations, the companies concerned in the EU have had to modify their internal procedures and policies to comply with the new requirements, including investing in many cases in the training of staff in relation to the new obligations.

We understand that there has been some regulatory uncertainty regarding certain aspects of the SFDR – for example, regarding the application of certain obligations to entities established outside the European Economic Area or whether a financial product that includes ESG factors in its decision-making This process falls within the scope of article 8 of the SFDR, which sets criteria for ESG funds. However, guidance should be issued in the future to clarify certain obligations under the SFDR.

Current reform in the United States

While we await concrete regulatory reform here in the United States with respect to the transparency and consistency of ESG matters in financial markets, there has been some reform in the United States through published guidelines that are relevant to fund financing.

In 2019, the Loan Syndications and Trading Association (LSTA), the Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA) published the Sustainability Linked Loan Principles (SLLP), which were recently updated in July of this year. , and also published the Green Loan Principles, which were last updated in February of this year. The objective of this published guide is to promote the development and preserve the integrity of the sustainability linked lending and green lending product by providing guidelines that capture the fundamental characteristics of these loans, thereby promoting the sustainable development of more generally. Interestingly, in the May 2019 version of the SLLP, engaging an independent third party to verify the borrower’s performance against each sustainability goal was a recommendation; it is now a “necessary element” according to the latest SLLP.

Additionally, in May this year, the LSTA released an ESG Due Diligence Questionnaire, which is designed to be completed by the borrower and included with other due diligence documents and aims to provide greater transparency on ESG initiatives. of the borrower.

Perhaps the main driver of change in the market, however, has come from the investors themselves. For example, in cover letters we have seen a growing number of GPs recognizing investor commitment to various indices such as the United Nations Principles for Responsible Investment (PRI), and we understand that investors have asked GPs to put these considerations into practice while making investments. We also understand that many investors insist on tailor-made ESG reporting requirements, which remains difficult as there is no widely adopted standard ESG reporting model.

Things also seem to be moving at a higher level, but not as fast as our European counterparts in this area. First, it was clear from the start of the Biden administration that she would support various ESG initiatives. Interestingly, the SEC released a regulatory agenda in June 2021 that signaled the SEC Chairman’s focus on ESG issues, including disclosures regarding climate change, board diversity, risks cybersecurity and human capital management. Finally, it should be noted that the 26th United Nations Climate Change Conference is scheduled to take place in Scotland later this year (November 2021), with many attendees preparing to discuss the progress made since the 2015 Paris Agreement. and what to do next. . It is likely that we will see additional guidance emanating from the Conference. All of these appear to be positive steps towards reform in this space.


While it remains to be seen in which direction the United States will go in terms of regulation, it is quite clear that reform is ahead. In the absence of harmonized rules on the information to be provided to end investors in matters of sustainability, for example, divergent measures will continue to be adopted, different approaches in different financial services sectors will persist, leading to significant distortions of competition due to significant differences in information. standards.

While there appear to be natural start-up issues with the SFDR, this piece of legislation will undoubtedly serve as a precedent for other jurisdictions seeking to achieve the common goal of ensuring a transparent approach to sustainability within markets. financial.

The United States has the advantage of being able to learn from other jurisdictions such as the EU before implementing additional regulations or guidelines. One would hope, however, that the regulation, if and when it arrives in the United States, would act as a means of clarifying and encouraging market participants in ESG matters, rather than as a deterrent.

See also our before Fund Finance Friday relevant articles in this context:

ESG loans – the next big wave in fund financing, where we examine the what, why and how questions related to sustainability lending; and

The 10 main elements to take into account when structuring your ESG facility, where we discuss the terms of the most relevant credit facilities in the context of ESG facilities.

The ABCs of ESG, where we review the fundamentals of ESG.


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