As the presence of environmental, social, and governance (ESG) criteria in European corporate CLOs has increased, it is also no surprise that the Sustainable Financial Disclosure Regulation (SFDR) imposed ESG disclosure obligations in March of this year.
What is the Regulation?
The SFDR imposed mandatory ESG disclosure obligations for asset managers and other financial market participants with the substantive provision of the regulation in effect from 10th March 2021. The first level of the regulation took effect in March of this year, with the more detailed disclosure requirements relating to disclosures in the periodic reports of ESG-focused products are slated to apply from January 1st, 2022.
The regulation sets specific rules for how and what sustainability-related information these market participants need to disclose and is applicable to all market participants, regardless of whether their CLO was classified as an ESG CLO or not. Managers are required to disclose certain information about how they integrate sustainability risks into their investment decision-making process, and how they take into account principal adverse impacts of their investments on sustainability factors.
The aim of the SFDR regulation is to enhance and standardize ESG-related disclosure. As the Trepp team has discussed in the previous European Market Update’s, there has been a lack of data and standardization when it comes to ESG criteria in European CLOs deal documentation. This regulation enhances the standardization of the push for ESG CLOs.
As S&P Global recently highlighted, the implementation of the SFDR is also further encouragement for EU CLO managers to make intentional and strategic decisions about their approach to sustainability. For example, as the piece highlights, to communicate how a product impacts the sustainability markers, providers will now have to decide whether to measure the impact.
News in the UK
As highlighted above, the regulation is applicable to asset managers and other financial market participants within the European Union. The UK has not yet implemented the SFDR into its domestic law. This means it is possible that many UK-based managers of European CLOs will be outside the scope of SFDR, which we could see impact market behavior across the continent.
In summary, the SFDR regulations will certainly impact the European CLO market given that they will require further review and communication of those involved when it comes to sustainability and ESG criteria.
Could this mean more regulations or the development of a new process? Could this mean more sustainable CLOs in the future? Could this mean more UK CLO managers? Trepp will continue to monitor these regulations and the impact they have on the European CLO market both in terms of ESG and sustainability criteria, and market participation… stay tuned.
- Elmas Aydemir
Compliments of Trepp – a member of the EACCNY.