Moody’s reminds firms that ESG disclosure could increase costs

European_ParliamentThe increased costs for asset management firms from EU disclosure rules to do with responsible investing will come in part from the need of some firms to upgrade systems and make additional hires, Moody’s has said.

The credit rating firm warned last year that asset managers’ business costs could increase by as much as 2% due to the implementation of EU rules about responsible investment. 

The European Parliament and member states agreed the stricter disclosure rules aimed at preventing “greenwashing” by asset management firms on March 7 and in a newer report Moody’s said updating product offerings and prospectuses, as well as explaining how firms include environmental, social and governance (ESG) factors, will come with “heavy one-off implementation costs”, while ongoing costs would potentially be new staff and training for salespeople.

However, firms that are adapted to the newer ESG environment and which have pioneered sustainable investments are predicted to benefit from the EU’s stricter disclosure rules.

Data quoted by Moody’s and sourced from Broadridge FundFile show ESG funds across bonds, equities and mixed assets growing 16% a year since 2010.

Under the rules, asset managers will have to disclose procedures they have in place to integrate ESG risks into their investment-making process and the extent to which those ESG risks might affect profitability.

Also, asset managers pursuing a green investment strategy must disclose how this strategy is implemented and the sustainability or climate effect of their products.

Moody’s has estimated that managers’ costs could increase 0.25%-2% depending on their current ESG capabilities.

The ratings firm also predicted in December that firms faced weaker demand and lower fees this year.

The agreed rules are to be submitted to EU ambassadors for endorsement before the European Parliament and Council are called on to adopt them.

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