(Bloomberg) -- Europe’s main investment management association says U.S. and U.K. hedge funds will need to meet a higher ESG reporting bar than many in the industry had expected, if they want to continue selling to clients in the EU.

The European Fund and Asset Management Association (EFAMA), whose members include BlackRock Inc., the asset management arm of JPMorgan Chase & Co. and Pacific Investment Management Co., said recent guidance from policy makers means hedge funds and private equity funds targeting EU clients need to state whether their actions -- in any part of their business -- might harm the environment. 

The sub-clause in question -- the Principal Adverse Impact (PAI) rule -- is part of Europe’s Sustainable Finance Disclosure Regulation enforced earlier this year. Hedge funds based outside Europe had hoped that PAI only applied to the products they sold to European clients, not to their entire business. But Europe’s rulebook for environmental, social and governance investing is proving more far-reaching in its scope than many investment managers had anticipated. 

Read More: Hedge Funds Hit by ‘Onerous’ ESG Rule Turn to Lawyers 

Dominik Hatiar, EFAMA’s regulatory policy adviser for sustainable finance, says the stricter interpretation of European ESG rules follows discussions between his association and the European Commission. 

“In practice, this would mean that the non-EU manager needs to publish its sustainability risk policy and make a comply or explain decision on the PAI regime,” he said. For managers with more than 500 employees, “the PAI reporting regime would be mandatory,” he said.

Many hedge funds outside Europe are already turning to their lawyers for help. Attorneys at Simmons & Simmons LLP and Dechert LLP have said they’re advising clients not to assume the stricter regulation will apply to them just yet, given the far-reaching consequences of doing so.

EFAMA also says it would still like clearer guidance from the European Commission. “We hope that this question will be further clarified,” Hatiar said. He expects the commission to provide more information in the form of an updated Q&A in the first half of next year.

A European Commission spokesperson who handles SFDR questions hasn’t responded to a request for comment.


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