Policy & Regulation

Investment Managers Beware: EU Exports Regulation Too

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A global economy is a double edged sword. To wit, it’s not just products, services and technologies that flow across borders.  Regulations do too.

Porous Borders

It’s with this notion in mind that US asset managers should keep a wary eye on the European Commission’s Action Plan on Financing Sustainable Growth which puts the onus on investment manage to maintain environmental, social, and governance (ESG) standards.   The most recent legislative proposal by the body has been tabled, which has added more uncertainty into just how far reaching this legislation may be, and consequently, it impacts on U.S. asset managers who service EU investors.

And make no mistake, regulations there have an impact here. One need to look no further than Markets in Financial Instruments Directive 2 (MiFID 2) designed to offer greater protection for investors and inject more transparency into all asset classes: from equities to fixed income, exchange traded funds and foreign exchange.  While this sounds innocuous enough, The Investment Adviser Association dubbed the directive “a massive headache” with individual managers saying MiFID 2 created an “uneven playing field.”

Standard Setters

To traditional asset managers, being told by policy makers how to do investment analysis, factoring in say, social values and climate change is well, alarming. For those of you unfamiliar with “ESG,” there is a global movement to require more investor attention to how a company executes on environmental, social and governance duties.

While  the “G” or governance aspect is, generally speaking, already baked into investment analysis, it is the polarizing discussion around the E and the S that ignites debate on the role of public companies to report, investors to promote and regulators to declare what constitutes good corporate citizenship.

Europe is fully immersed in the belief investors should force social and climate policy gospel on industry.  Regulators are ineffective, politicians are ineffective, and companies resist anything that does not serve their commercial interest. Hence, it is left to the shareholder to serve up some discipline on E and S.  However, while European investors and market regulators seem more comfortable with growing ESG responsibilities for market stakeholders, western markets, particularly the U.S., are less persuaded.

Historically, the decisions on how money is to be managed and what things are to be considered is between the owner of the assets and the investment manager.   If the owner wishes for their assets to be used to make social or environmental statements that is a matter for the investor to decide.  There are many products and managers that specialize in the ESG space. 


Yet, as ownership of the assets gets more and more dispersed and investors become indistinguishable within a huge mutual or index fund, perhaps there is no way for the individual asset owners to be consulted on how their AUM should be used.   Thus, more discretion might be given to the investment managers to make some of those decisions and to consider how ESG factors might be used.

As Europe ponders its future ESG course, US investors and markets need to pay heed. As we have seen with Markets in Financial Instruments Directive or MiFID 2.  In the end, the SEC had to step in to provide U.S. brokers help with the most nettlesome aspect of MiFID 2 in the form of a no action relief.  That this relief sunsets in 30 months however means the tide from EU regulation is, ultimately, unstoppable.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Kurt Schacht

Kurt N. Schacht, JD, CFA is Managing Director for CFA Institute’s advocacy group. He has overseen CFA Institute policy research, standards and government relations area, and has been responsible for the CFA Institute Code of Ethics and Standards of Professional Conduct, the Global Investment Performance Standards (GIPS®), and the CFA Institute Asset Manager Code and one of its flagship publications, the Financial Analysts Journal. Prior to joining CFA Institute, he served as chief operating officer for a mutual fund complex, general counsel and COO for a Manhattan based hedge fund, and as deputy director/chief legal officer for the State of Wisconsin Investment Board (SWIB). He is an industry practice expert on investment management, corporate governance and financial service industry regulation, including Investment Company Act and Investment Advisers Act rules and practice.

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