Investment management update

Welcome to the latest edition of our investment management update. This publication has been tailored to highlight topical news, cases and changes in the law impacting the investment management sector.

On 28 April, HM Treasury published a consultation on the creation of a new Reserved Investment Fund (RIF), a form of unauthorised contractual scheme which will be open to professional and institutional investors, but not available to a broader retail investment market. The consultation asks whether respondents support the creation of the RIF, whether the fund should be subject to restrictions for instance in its ability to invest, the RIF’s branding, and the applicable tax regime. The proposal is a development of the Government’s 2019 consultation on reforms to the UK Fund Regime. The current consultation will close on 9 June.
On 24 April, the FCA published guidance on enhancing the resilience of Liability Driven Investment (LDI) funds, and The Pensions Regulator (TPR) also published guidance for pension scheme trustees on using leveraged LDI. Both items were published to address the March recommendations of the Bank of England’s Financial Policy Committee. The FCA’s guidance suggests several areas for improvements and the FCA will work with firms to assess their progress and resolve deficiencies. The FCA says that similar vulnerabilities might be present in other forms of (non-LDI) investment and that managers should consider the applicability of the guidance to their business. TPR’s guidance focuses on the role of LDI within a portfolio, collateral buffers, testing for resilience, governance, and monitoring.
On 18 April, the Bank of England’s Sarah Breeden, Executive Director for Financial Stability Strategy and Risk, asked UK companies to use carbon prices consistent with a net zero trajectory for the purposes of planning their transitional activities. The context for Breeden’s speech was an overview of the Bank of England’s work on net zero transition and an indentification of four challenges to a successful economy-wide transition, namely: gaps in the transition finance infrastructure; the uncertainty caused by political and economic headwinds; the demand on firms to make decisions without full clarity about the pathway to net zero; and the need to coordinate action throughout the supply chain.
On 11 April, FinDatEx published a new version (version 4.1) of the European MiFID Template (EMT). The update encompasses information to help European distributors comply with the Consumer Duty requirements for products marketed to retail investors in the UK.

On 25 April, the EU agreed several measures that aim to achieve its net zero targets: to cut emissions by 55% (compared with 1990 levels) by 2050 and to achieve carbon neutrality by 2050.

The measures include a carbon tax and reforms to the EU’s emissions trading scheme (ETS). The EU Carbon Border Adjustment Mechanism (CBAM) seeks to address “carbon leakage” by equalising the price paid for goods produced outside the EU with those produced in the EU and subject non-EU producers to purchase CBAM credits under the region’s ETS. In addition, the ETS will be reformed to cover 62% of sectors up from 43% and will extend coverage in shipping and aviation. The EU will also establish a Social Climate Fund to redistribute funds to people that are vulnerable to changes in the ETS, such as public transport users. The EU’s institutions also reached an agreement on measures to decarbonise aviation, primarily by switching to “Sustainable Aviation Fuels”.

Finally, on 19 April, the European Parliament approved the Deforestation Regulation that bans products with links to forest degradation within their supply chain. The regulations will be published in the EU’s Official Journal soon.

On 24 April, the European Council adopted the Pay Transparency Directive. The legislation requires transparency over the gender pay gap and introduces new penalties for pay discrimination and compensation for victims. Following publication in the EU’s Official Journal, Member States will have three years to implement the rules.
On 24 April, the ECB and EIOPA published a joint discussion paper on insuring households and businesses against climate related natural disasters such as flooding and wildfires. Among the potential policy options discussed are expanding the market for catastrophe bonds, which are issued by reinsurers and enable investors to bear some of the risks. The regulators also suggest that a pan-EU catastrophe fund could underpin the insurance regime.
On 21 April, the ECB published the results of its third review into banks’ climate and environmental risk disclosure. The ECB concluded that few banks are prepared to comply with the EBA’s reporting requirements that are due to take effect later this year (as early as June 2023 for some banks).
On 20 April, the European Parliament adopted the Markets in Crypto Assets (MiCA) regulations. The series of regulations will provide for a harmonised digital assets regime across the EU. Crypto-Assets Service Providers will be required to register with a Member State. Rules will also apply to specific types of crypto-asset, introduce a market abuse regime and impose limits on the issuance and use of stablecoins. The regulations will apply from July 2024.
On 18 April, four environmental NGOs (ClientEarth, the WWF European Policy Office, Transport & Environment, and BUND) are suing the European Commission for their inclusion of natural gas in the EU’s Taxonomy. The group filed a lawsuit at the European Court of Justice claiming that treating gas as sustainable would worsen Europe’s dependence on fossil fuels and is unlawful. A General Court hearing could happen in the latter part of 2024 and a judgement might be given in 2025.
On 14 April, the EC published its long-awaited Q&A on the SFDR, responding to 8 questions from the ESAs given in September 2022. The Q&A importantly addresses the definition of “sustainable investments”. The answers also cover products with a carbon reduction objective, PAI reporting at the product and entity levels, and periodic reporting for portfolio management.
On 12 April, the European Supervisory Authorities (ESAs) published a joint consultation on reforms to the SFDR. The EC requested that the ESAs review and suggest reforms to specific parts of the SFDR Level 2 legislation, particularly relating to Principal Adverse Impact (PAI) reporting. The ESAs requested a six-month extension to the original end April 2023 deadline to provide final advice to the EC so as to give the ESAs sufficient time to address the request. Surprisingly, the ESAs have proposed changes to the SFDR that go beyond the mandate given to them by the EC, additionally suggesting changes to the SFDR reporting template. The ESAs propose the creation of a dashboard disclosure, as a summary of the more detailed sustainability information in the disclosure template. The consultation also suggests improvements relating to the Do No Significant Harm requirement. The consultation will close on 4 July. The feedback will inform the ESAs proposed revisions to the RTS later this year in response to the EC’s mandate. The EC is also expected to undertake a wider review of the SFDR (the Level 1 legislation required an “evaluation” before 2023) and there are calls from the AMF for a “targeted review” focused on the creation of a fund labelling regime within the SFDR.
On 10 April, the EC consulted on draft technical criteria for the four remaining environmental objectives under the EU’s Taxonomy (i.e., water and marine use, circular economy, pollution, and biodiversity; while the technical criteria for the first two climate-related objectives have been finalised). The draft proposals exclude the politically contentious sectors of forestry, fishing, and agriculture. The EC is expected to adopt the finalised technical criteria in the form of a delegated act (dubbed “Taxo4”) on 30 June. The remaining contentious sectors are due to be handled in separate and subsequent legislation. The EC’s consultation will close on 3 May.

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Investment management update

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