Regulatory outlook: This year will see the most impactful output to date

The work on reporting and disclosure is starting to pay off – but more is to come in 2023


Natalie Kenway

This year the sustainable investment industry will start to see more detailed and useful output as a result of the rapid changes in legislation, reporting and disclosure put in place over recent years, but asset managers will still need to take time to clarify theirs and their funds’ positions on ESG as well as work on data accuracy.

It has already been a busy start to the year with the much-anticipated phase 2 of the Sustainable Finance Disclosure Regulation and its Regulatory Technical Standards (RTS) rolled out on 1 January. In a bid to boost transparency, this requires fund providers to supply detailed sustainability-related disclosure obligations, and complete mandatory reporting templates, which includes a set of indicators for their principal adverse impact (PAI) statements.

“In 2023, EU regulation will remain key for ESG investing. Indeed, with most requirements of the SFDR RTS effective from 1 January 2023, the New Year should crystalise market practices – and differences – in the application of this regulation,” commented Marie Niemczyk, head of ESG – client portfolio management at Candriam.

This, combined with further corporate disclosures as a result of the EU taxonomy and the global framework being compiled by the International Sustainability Standards Board (ISSB) set to be rolled out to corporates in the first half, will make 2023 another milestone year in a period of significant regulatory change for finance.

Andy Pettit, director of policy research at Morningstar, explained: “Five years on from the EU’s Sustainable Finance Action Plan, 2023 will see some of the most impactful output to date. Investors will get first sight both of products’ granular ESG results, courtesy of the first annual SFDR detailed templates, and, by mid-year, the inaugural PAIs of the product manufacturers. Meanwhile, a first tranche of corporates will disclose the proportion of turnover, capex and opex aligned with EU taxonomy activities.”

Of course, both SFDR and the taxonomy will remain works in progress, he added.


As ESG Clarity has reported over the past few years, phase 1 had its own problems as it emerged funds that invest in fossil fuels may be included in its ‘darkest green’ category Article 9 – something commentators have argued an investor would not expect. In the lead-up to the end of 2022, numerous funds were downgraded from Article 9 to Article 8 as asset managers erred on the side of caution.

Matthias Breier, head of ESG product at FE fundinfo, said: “2023 will be strongly driven by a topic that was already discussed at the end of 2022: the exodus of Article 9 funds. There is still a lot of confusion and uncertainty around the SFDR regulation in the market and the vast categorisation changes will hopefully come to a close sooner rather than later.”

Pettit said he expects the European Commission to soon publish more SFDR clarifying Q&As and Niemczyk said it is likely “adjustments will be made in how requirements are applied and that supervisors provide additional guidance” for the latest SFDR requirements too.

Meanwhile, the European Securities and Markets Authority is exploring the imposition of more restrictive use of ESG-terms in financial product names, Pettit highlighted.

“It’s a topic on the radar of other national regulators and a microcosm of the many regulatory similarities and differences that product providers and corporates will increasingly have to navigate when conducting business internationally,” he said.

The UK has also proposed its own set of fund labels under the Financial Conduct Authority (FCA)’s Sustainability Disclosure Requirements (SDR) providing asset managers with the further challenge of aligning with both SFDR and SDR this year – finalised proposals for the wider consultation on fund labelling are set to be published by mid-2023. Furthermore, the first greenwashing rules under SDR are also coming in this year – by 30 June 2023 the anti-greenwashing rules for all FCA-regulated firms comes into force.


While the PAI reports that come under SFDR are in the market now, this year also comes with the update of the taxonomy to include gas and nuclear power, representing a “clear challenge”, according to Breier.

“This update of the regulation will require a resubmission of all pre-contractual reports once the necessary publication in the EU journal is done,” he explained, while later in the year the delegated act for the next four taxonomy objectives is expected.

Candriam’s Niemczyk added: “We will also be monitoring potential developments in other regulatory components, like the environmental and social taxonomies. Key is that regulation uses objective, science-based targets as much as possible, avoiding politicisation.

In the UK, investors are also awaiting the delayed announcement regarding the proposals and implementation of a UK green taxonomy. A statement made on 14 December 2022 said the government is repealing the legal requirement to make technical screening criteria regulations by 1 January 2023 and needs another year to decide the UK’s approach.

Clarifying the data

In a region that adopted many sustainable finance requirements over the past five-to-10 years, ahead of the UK, Asia and the US, Europe has made “remarkable progress in the sustainable finance space”, said Vincent Ingham, director of regulatory policy at the European Fund and Asset Management Association.

However, he caveated that with: “A lot remains to be done to complete the evolving framework and address the main implementation challenges faced by practitioners, namely the lack of consistent and reliable corporate ESG data (which the recently adopted Corporate Sustainability Reporting Standards should partly address once becoming applicable as from 2024) and the need for clear definitions of key concepts underpinning the regulation to ensure consistent implementation of the rules across member states and reduce greenwashing risks.”

Likewise he pointed to the legislative debate on the Corporate Sustainability Due Diligence Directive, which will be important throughout 2023, especially in regard to the “scope of application and its impact on the financial services industry as a whole”.

With the focus on greenwashing, and investors, NGOs and regulators not afraid to call out those blurring the lines, it is time for asset managers to ensure they are being clear with investors on where they stand.

Niemczyk told ESG Clarity: “While EU regulation aims to provide a common reading grid for ESG products, we are also in a period of increased scrutiny. Asset managers should see this as an opportunity to clarify concepts (sustainable, green, impact, etc.), to ensure they are assigned proper meaning. Similarly, it is important to be transparent on how regulatory indicators, such as the SFDR PAIs, are measured.

“ESG data remains critical in regulatory implementation in 2023. Asset managers should communicate how they select data and assess quality and materiality. In parallel with regulators pushing for greater corporate ESG disclosures, investors have an important role to play here through their engagement activities.”

Echoing this sentiment, FE fundinfo’s Breier said this brings fund providers increased opportunities too and those operating in the UK and Europe need to work harder: “More and more regulators are dealing with this topic. The key opportunity therefore is an increased alignment across these regulations. Especially, the divergence between the EU and the UK requires some mutual communication and learnings on both sides to ensure a high quality regulatory regime that also allows fund managers to work on clear communication to investors.”

Latest Stories