Hedge funds are seizing the rising tide of opposition to European ESG rules as an opportunity to seek exemptions from some environmental, social and governance reporting requirements.
At issue is whether alternative investment managers should have to disclose ESG data on assets they invest in on behalf of their clients, under the European Union’s Corporate Sustainability Reporting Directive. CSRD, which is designed to apply to all sectors, is currently the subject of intense debate as Germany and France seek to limit its scope. The EU’s financial services commissioner, Maria Luis Albuquerque, has said there’s room for adjustments in light of the criticisms.
It’s against that backdrop that the Alternative Investment Management Association, whose board includes Bridgewater Associates and Millennium Management, now says that its members should be exempt from reporting on clients’ assets.
“It’s creating an enormous burden on firms that really don’t have the sort of environmental or social footprint that a manufacturing company might,” said Adam Jacobs-Dean, global head of markets at AIMA, whose members oversee roughly US$4 trillion ($5.41 trillion) of combined assets.
“And some of them won’t even have European investors or clients,” he said. “So who is the reporting for?”
The pushback from the hedge fund industry is the latest in a litany of complaints from business leaders and lawmakers who say ESG rulemaking in Europe has gone too far. They point to the bloc’s stagnating economy, and warn that competitiveness will slide further as US President Donald Trump forces through a program of deregulation on the other side of the Atlantic.
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Jacobs-Dean said hedge funds and private equity managers operating in the EU already provide the necessary data because they comply with the bloc’s ESG rulebook for the financial industry, the Sustainable Finance Disclosure Regulation.
Such efforts to resist ESG regulations have succeeded in the past. After heavy lobbying from banks, asset managers and insurers, the EU agreed last year to exclude those sectors from the full scope of the Corporate Sustainability Due Diligence Directive, which exposes firms to litigation risk if ESG violations are found in their supply chains.
Similar concessions should now be applied to CSRD, Jacobs-Dean said. That would represent a “quick win”, he said.
The EU is due to propose changes to CSRD and several other pieces of legislation at the end of this month, as part of its so-called omnibus process. Officials have acknowledged the EU’s ESG framework needs to be adjusted but caution against expecting outright deregulation.
Beyond the hedge fund industry, asset managers more broadly are complaining that CSRD doesn’t make clear whether their reported value chains should include client assets. The question was to be clarified in guidance, but has been slowed as EU officials instead focus on adjusting ESG rules related to the needs of small- and mid-sized companies.
“Due to this lack of certainty, there are diverging interpretations by the auditors on the scope of application,” said Laurence Caron-Habib, head of public affairs at BNP Paribas Asset Management.
Requests for clarification have now been sent to the commission from the Association of the Luxembourg Fund Industry, the Dutch Fund and Asset Management Association and the European Fund and Asset Management Association, whose members include Amundi, BlackRock and the investment arm of JPMorgan Chase & Co.
“We would like the forthcoming simplification omnibus to confirm our interpretation that CSRD client reporting is currently excluded until these issues are resolved,” said Andreas Stepnitzka, deputy director of regulatory policy at EFAMA, whose members manage US$34 trillion.
A spokesperson for the European Commission said it’s looking into the matter.
Jenn-Hui Tan, chief sustainability officer at Fidelity International, said his firm is prepared to report both ways, “depending on how the regulation comes out”. But including client assets risks “potentially confusing messages”, when compared with SFDR reports.
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Lawyers advising asset managers, meanwhile, are urging their clients to err on the side of caution. In the absence of clear guidance, “the prudent view is to assume that investments are in scope”, said Raza Naeem, a financial regulation partner at Linklaters.
Dan Grandage, chief sustainability officer at Abrdn, said that for now, the goal is “to ensure that we complete the disclosures in a timely manner and well ahead of the deadline”.
For hedge funds, however, AIMA said it’s less a discussion around which corners of the value chain should be in scope and more a question of whether they should even be asked to report such data in the first place.
