EU Sustainable Finance Disclosure Regulation – An Update – Fund Management/REIT


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Key points to remember:

  • The European Advisory Authorities (“ESAs”) have published final Regulatory Technical Standards (“RTS”) for sustainability disclosures under the Sustainable Finance Disclosure Regulation (“SFDR”), together with questions to the Commission regarding the interpretation of the SFDR and EU Taxonomy for sustainable activities.

  • However, further changes to the RTS could still take place as, in May, the Commission published two letters to the ESAs, calling for changes to the environmental conditions and the Principal Adverse Impact Indicators (“PAI”) in the RTS.

  • Various directives and regulations delegated to the Alternative Investment Fund Managers Directive (“AIFMD”), Undertakings for Collective Investment in Transferable Securities (“UCITS”) and the Markets in Financial Instruments Directive (“MiFID”) ) arising from SFDR will first apply in August 2022.

The EU Regulation on Sustainability Disclosures in the Financial Services Sector (the “SFDR“) entered into force in March 2021. Subsequently, the European Supervisory Authorities (the “ESAs”) produced on 6 April 2022 the final regulatory technical standards (“RTS“), including the models for publication by the funds under Article 8 or Article 9 of the SFDR. The RTS are subject to the final approval of the European Parliament and the Council. Since that date, the Commission and the European Supervisory Authorities have published documents which indicate that SFDR rulemaking has not yet completed its initial phase.

The ESAs published on May 13, 2022 a series of questions they recently asked the European Commission (the “Commission”) regarding the interpretation of the SFDR and the EU taxonomy for sustainable activities. This is an important document: the ESAs have raised key interpretive issues that the industry as a whole has debated since the inception of the SFDR. The Commission’s responses will therefore be crucial.

Questions include the following:

  • Whether a company can consider major adverse impact factors (“PAI”) only for a subset of its funds and disclose that approach under Article 4 of the SFDR, which covers website disclosure of a company for its consideration of PAI factors.

  • The application of SFDR to a financial adviser, particularly where the adviser recommends investments that are not financial products within the scope of SFDR, such as investments in securities and bonds.

  • Whether Articles 6 and 7 of the SFDR (which require companies to include sustainability-related information in all their financial products) apply to financial products that are no longer available to investors.

  • If a fund within the scope of Article 8 or 9 of the SFDR does not invest in companies with good governance, whether it is able to continue to classify under Article 8 or 9 of the SFDR.

  • If a fund within the scope of Article 8 does not commit to investing in environmentally sustainable investments, if that fund is required to disclose taxonomy alignment information, and if it then invests in environmentally sustainable investments, whether the fund is required to disclose taxonomy alignment information.

Furthermore, with regard to the RTS containing the publication and declaration templates, the Commission published two letters to the ESAs on 6 May 2022, each proposing modifications to the RTS. the first letter invites the ESAs to make specific modifications to the RTS in the light of the recently adopted Supplementary Climate Delegated Regulation. The Supplementary Climate Delegated Regulation defines the specific conditions under which activities related to fossil gas and nuclear energy are considered as activities that contribute to the climate transition and are therefore eligible under the EU environmental taxonomy . Therefore, the Commission requires specific disclosure in pre-contractual documents and continuous disclosure of a fund’s exposure to investments in fossil gas and nuclear related activities. We can expect changes to the RTS (and models) in due course.

the second letter invites the ESAs to consider much broader changes to RTS. The RTS include the list of PAI environmental and social indicators that companies falling under Article 4 of the SFDR are required to measure and report. In open language, the letter invites ESAs to review the PAI regime by considering expanding the list of PAI factors and refining the content of the factors by revising their definitions, methodologies, measurements and presentation. The letter suggests that more information be provided regarding “evidence that investments are up to standard” and that “implementation and enforcement efforts” in relation to the PAI factors are taking place. The extent of the review is unclear, but could in principle involve a comprehensive review of the PAI scheme. Separately, the Commission invites the ESAs to propose changes to the regulatory technical standards on the information provided in pre-contractual disclosure and periodic reports on decarbonisation targets, including “intermediate targets and milestones”. Reference is also made to a possible review of the information provided in the pre-contractual disclosure and the periodic reports on the alignment of the portfolio with the EU environmental taxonomy.

Finally, various directives and regulations delegated to the Alternative Investment Fund Managers Directive (“AIFMD”), Undertakings for Collective Investment in Transferable Securities (“UCITS”) and the Markets in Financial Instruments Directive ( “MiFID”) from SFDR apply for the first time in August 2022.

A new MiFID Delegated Regulation on the integration of sustainability factors and preferences into organizational requirements and business operating conditions requires that a client’s sustainability preferences are taken into account in the suitability check. This will apply where a MiFID regulated firm provides investment advice or portfolio management to a client. Sustainability preferences refer to the client’s preference to invest in financial instruments with a minimum proportion of environmentally sustainable investments (taxonomy-aligned investments), with a minimum proportion of sustainable investments (the general concept of Article 2, paragraph 17, of the SFDR) or which take into account the main negative impacts “when the qualitative or quantitative elements demonstrating this consideration are determined by the customer or potential customer”. As noted above, there is currently some uncertainty as to whether financial advisers fall within the scope of the SFDR with respect to investments (such as bonds) which themselves fall outside the scope. of the SFDR. The Delegated Regulation also obliges companies to consider sustainability risks in overall organizational requirements, in risk management policies and in conflicts of interest (where a conflict may affect a client’s preferences in sustainable development). This applies from 2 August 2022. The European Securities and Markets Authority (“ESMA”) has recently published a consultation on suitability testing guidelines, including draft guidance on how companies should include sustainability factors in the suitability check.

For alternative investment fund managers (“AIFM”), a delegated regulation on sustainability risks and factors to be taken into account by AIFMs requires AIFMs to take into account sustainability risks (and the main negative impacts , if they consider them) in the due diligence process and the sustainability risks in the risk management policy and to update the policies on conflicts of interest for conflicts that may arise from the integration of sustainability risks. sustainability. It also requires companies to factor sustainability risks into overall organizational requirements, including governing body responsibilities. This applies from 1 August 2022.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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