ESG and sustainable finance: Evolving asset management Regulation 2025 report

Driven in no small part by political considerations and the escalating growth and competitiveness agenda, the rapid pace at which sustainability-related rules were developed and implemented has slowed.

In this year’s edition of KPMG International’s Evolving Asset Management Regulation report, KPMG professionals explore the shifting priorities driving the ESG and sustainability agenda around the world.

Over the last few years, the pace of change in sustainability-related regulation has been rapid. However, in the past year, there has been a notable change in focus. Regulators in many jurisdictions continue to champion sustainability initiatives. But the tone is somewhat more muted, with a corresponding reduction in the introduction of new sustainability frameworks.

“The focus on ESG and sustainable finance is shifting. Few new frameworks or regulations have been introduced recently,” says Jim Suglia, KPMG International’s Global Head of Asset Management.

“Much of the action here has been around clarifying regulatory expectations on fund names, and preparations for new economy-wide corporate reporting requirements in many jurisdictions.”

Rethinking strategic sustainability frameworks

In recent years, some of the most significant and impactful developments covered in this report have related to sustainable finance regulation. As such, the absence of substantial new financial services sustainability frameworks, including those that cover areas such as governance or risk management, is notable. In some markets, proposals for additional requirements have been reconsidered.

However, as this year’s Evolving Asset Management Regulation report notes, some jurisdictions are taking action, partly to catch up to those with more established rules and guidance in this area.

Improving disclosure regimes

Asset managers’ disclosure requirements are now reasonably embedded in many jurisdictions. However, the regimes were often developed at pace and the implementation process was not always smooth. And in some cases, published disclosures have only been accessed by a small number of clients. Regulators are now turning their attention towards making improvements.

Moving into this new phase, we do not expect a wholesale rollback of existing requirements, but there is widespread support to make existing requirements more targeted and proportionate.

Tightening fund naming requirements

As predicted in last year’s EAMR report, new restrictions have now entered into force around the ESG- and sustainability-related terms that funds may use in their names and marketing materials.

Fund managers in larger jurisdictions have worked at pace to ensure their products’ names are aligned to the new requirements. In some cases, regulators have pushed back their compliance deadlines to provide firms with more time to meet their requirements.

Defining defense-related investments

With geopolitical dynamics rapidly changing, governments are setting ambitious new targets for defense-related spending and encouraging the use of private capital to support their ambition. That has raised the question of whether such investments can be considered to be sustainable.

We have seen some regulators issue clarification statements or revisiting their processes for approving defense-related funds. However, asset managers need to navigate some new requirements too, with this topic gaining prominence in public and policy arenas.

Evolving corporate reporting requirements

At the same time, the changing shape of sustainability-related corporate reporting requirements will impact many businesses, including asset managers and their portfolio companies. While some new requirements are coming, others are being diluted or delayed. In some cases, the roll-out of new rules will provide significant new data to help inform asset managers’ investment decision-making.

Interestingly, we are already seeing some of the earlier regimes being revisited amidst questions regarding the proportionality, necessity and value of the information they produced, alongside pressure to deliver on the growth agenda.

This is especially relevant for smaller companies with fewer resources, where the effort required to produce the disclosures may not be consistent with their effectiveness in terms of encouraging capital towards sustainable activities.

Sustainability in the capital markets

Some regulators have taken steps to address potential risks associated with the transparency of ESG ratings, with outputs ranging from formalized frameworks in Europe that capture ratings providers to industry-led codes of conduct in the Asia-Pacific region.

Regulators around the world are also taking a specific interest in how asset managers use third party ESG data.

Opportunities and risks

Opportunities for asset managers
Risks for asset managers

Efficiency:

Asset managers can capitalize on the ongoing simplification of disclosure requirements to improve the quality of their disclosures and free up reporting resources to support other activities, such as investee engagement.
Insights:

The rollout of new corporate reporting requirements across the economy will provide asset managers with significant new information and data points to better inform their investment decision-making.
Diversification:

Clarifications about the alignment of defense-related investments with ESG criteria can offer new avenues for asset managers to diversify their portfolios while adhering to sustainability principles and meeting new investor demand.

Complexity:

Regulatory divergence continues to make it difficult for global asset managers to replicate their strategies consistently, thereby increasing compliance costs and operational complexity. This is likely to increase as political and growth and competitiveness agendas impact differently around the world.
Greenwashing:

The potential for enforcement actions related to greenwashing remains a significant risk, as evidenced by recent high-profile cases. Anti-greenwashing frameworks need to be complete and robust.
Uncertainty:

Delays, cancellations or simplification of disclosure requirements in certain jurisdictions have the potential to create uncertainty, impacting global asset managers’ approaches to disclosure. It is possible that streamlined disclosures may not meet some clients’ expectations.