EU Distribution for US Managers and Key Implications of Trump 2.0
The return of Donald Trump to the presidency of the USA comes with a set of far-reaching consequences for global relations. The withdrawal from the Paris Agreement, signed by the new US president soon after the inauguration ceremony, might seem like the most critical consequence impacting EU Distribution for US Managers.
Yet this move is interesting also for other reasons, not all immediately linked to global climate concerns. On the one hand, it signals a push towards deregulation. With more to come in other sectors. On the other, it sets officially the backdrop of regulatory divergence which will characterize relations between the USA and Europe going forward.
Trump 2.0 will present US fund managers eyeing European markets, or already present there, with different sets of challenges depending on their situation and stage of expansion in Europe.
Key takeaways
- The return of Donald Trump to the presidency of the USA comes with a set of far-reaching consequences for global relations. The withdrawal from the Paris Agreement, signed by the new US president soon after the inauguration ceremony, might seem like the most critical consequence impacting EU Distribution for US Managers.
- The stark contrast in approaches to ESG and sustainability issues at both sides of the Atlantic raises critical questions on the immediate future of EU Distribution for US Managers. The consequences of this recent shift of US administration will vary significantly depending on the types of fund managers and their level of integration into the European markets.
- Regulatory divergence aside, US fund managers face heightened cultural and narrative gaps with Europe, which could hinder their success in European markets. Under Trump 2.0, the US narrative is expected to continue to diverge from European priorities. Whilst cyclical appetite for certain US strategies and assets will remain an upside, the disconnect is real and might pose challenges yet unknown.
Exiting Again the Paris Agreement
Trump 2.0 kicks off with the retreat of the US administration from the Paris Agreement, which signals once again a step back from sustainability and wider ESG priorities. A move that was totally predictable. On the premise of being an unfair burden on American economy, President Trump had withdrawn already from the Paris Agreement under his first tenure. This decision comes within the context of a parallel and well-telegraphed progressive de-emphasizing of related social and governance issues, some of which were labelled woke already for quite some time. On the other side of the Atlantic instead, in a continued bid to channel retail savings and other capital markets investments in support of its ambitious goals of green transition, Europe continues to push forward with stringent ESG requirements.
The stark contrast in approaches to ESG and sustainability issues at both sides of the Atlantic raises critical questions on the immediate future of EU Distribution for US Managers. The consequences of this recent shift of US administration will vary significantly depending on the types of fund managers and their level of integration into the European markets.
US fund managers who are just beginning to explore European markets will likely experience fewer hurdles in the short term. These fund managers typically rely on arrangements with local independent management companies, either in Ireland or Luxembourg, and primarily operate their European funds under Article 6 SFDR. The lighter shade of green, which does not promote ESG or sustainability objectives nor related characteristics in the investment strategies. For as long as Article 6 SFDR remains a viable framework in Europe, these fund managers can largely avoid the escalating complexities of full compliance with SFDR in this climate of regulatory divergence. However, their long-term prospects in European markets could be at risk if EU regulators were to tighten their ESG standards or even further modify them. For the US fund managers who have ventured into Article 8 or Article 9 SFDR categories, the situation is more complex. These managers face mounting challenges under Trump 2.0, including more limited access to reliable ESG data from US based investee companies. Likely their choice for darker shades of green will come at a higher cost of running these strategies.
Over recent years, we witnessed mass downgrade from Article 9 to Article 8 SFDR already. In addition, tighter rules on the use of ESG and sustainability-related terminology in fund names have further contributed to this phenomenon. We can’t exclude that one of the consequences of Trump 2.0 on EU Distribution for US Managers will entail more downgrades, this time to article 6 SFDR.
AI Regulation
In addition to ESG themes, AI has emerged as a new frontier of regulatory divergence between the USA and Europe. Since the summer of 2024, the EU has started the process to officially introduce comprehensive regulations governing AI, with the aim to reduce inherent risks and foster ethical use of AI technologies. With the stroke of a pen, Trump 2.0 quashed the nascent AI Bill in the USA, leaving the sector free to grow without regulatory constraints. The now unregulated AI environment is expected to spur faster innovation and growth in all AI-related industries, creating a competitive advantage for US companies over European ones.
When it comes to the implications of the AI deregulation move on EU Distribution for US managers, a key question remains linked to the appeal of AI-themed ETFs in Europe. While the rapid growth of the US AI sector could enhance the attractiveness of these funds, we cannot entirely rule out yet that European authorities may demand greater transparency and even compliance with EU AI regulations.
AIFMD II Challenges
For those US fund managers utilizing non-European funds to access European markets through national private placement regimes, regulatory divergence presents significant hurdles. The revised AIFMD II introduces a new objective precondition to national private placement regimes. Non-EU funds must not be domiciled in high-risk countries under the EU AML directive. This requirement, originally designed as a response to Brexit and primarily with UK fund managers in mind, could be now used to hit US fund managers with funds domiciled in the Cayman Islands.
This development adds a moving target in the landscape of EU Distribution for US Managers. Should trade tensions escalate between the USA and Europe, one of the ways for Europe to retaliate might be by restricting access of non-European funds to its markets.
Conclusion
Regulatory divergence aside, US fund managers face heightened cultural and narrative gaps with Europe, which could hinder their success in European markets. Under Trump 2.0, the US narrative is expected to continue to diverge from European priorities. Whilst cyclical appetite for certain US strategies and assets will remain an upside, the disconnect is real and might pose challenges yet unknown.
Success in EU Distribution for US Managers will remain linked to that fine balance between mastering regulation and bridging the cultural and narrative gaps, taking in consideration the different perspective and expectations of European markets and investors.
About Veneziano and Partners
Veneziano and Partners is an international consulting boutique specialised in the European regulation of cross-border fund distribution. In catering to a selected group of investment managers, hedge fund managers and financial institution worldwide, the firm offers a custom-made service that is unique and allows its clients to gain competitive advantage in an ever increasingly regulated environment for global registration of UCITS and AIFMD funds.