ESG Reporting Exemptions: Hedge Funds Seek Relief from EU Disclosure Obligations
Hedge funds are leveraging the rising tide of opposition to European ESG regulations to push for exemptions from mandatory environmental, social, and governance (ESG) reporting requirements.
Under the European Union's Corporate Sustainability Reporting Directive (CSRD), alternative investment managers may be required to disclose ESG data on assets they invest in on behalf of clients. However, the Alternative Investment Management Association (AIMA), which represents hedge funds and private equity managers, is advocating for its members to be exempt from this reporting.
AIMA argues that hedge funds face an undue burden in complying with ESG reporting requirements due to their limited environmental and social footprints compared to manufacturing companies. "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.
The hedge fund industry's pushback against ESG regulations follows concerns raised by business leaders and lawmakers who argue that Europe's regulatory focus on ESG has gone too far. They point to the bloc's economic stagnation and warn that competitiveness could decline further amid President Donald Trump's deregulation agenda in the United States.
AIMA maintains that hedge funds and private equity managers operating in the EU already provide the necessary ESG data through compliance with the bloc's Sustainable Finance Disclosure Regulation (SFDR). The association is urging similar concessions for CSRD, which it sees as a "quick win."
The EU is expected to propose changes to CSRD and other ESG-related legislation later this month as part of its omnibus process. Officials have acknowledged the need for adjustments to the EU's ESG framework but have cautioned against outright deregulation.
Under CSRD, companies will be required to disclose ESG data starting in 2024 annual reports. Market data provider MSCI estimates that non-financial companies will disclose an average of less than 500 data points on key ESG themes such as climate and labor conditions.
Asset managers are also raising concerns over the scope of CSRD, specifically whether their reported value chains should include client assets. Industry associations have requested clarification from the European Commission, but guidance has been delayed due to efforts to adjust ESG rules for small and mid-sized companies.
Hedge funds maintain that the issue is not solely about the scope of value chain reporting but about whether they should be required to report ESG data in the first place.