10 March 2021 was D-Day for sustainable finance disclosures. From now on, financial market participants and financial advisers must apply the sustainability disclosure obligations set out in the EU Sustainability Finance Disclosure Regulation (‘SFDR’).
Financial markets participants and financial advisers must, without delay:
- decide if their products have sustainable investments as an objective or promote social and environmental characteristics,
- adapt amongst others their website disclosures, internal policies and pre-contractual client documentation (e.g. prospectus), and insert certain information in their periodic reports,
- avoid the use of the terminology « sustainable investment » if the product is not compliant with article 9 of the SFDR and not promoting ESG characteristics in advertisement of products which are not compliant with article 8 or article 9 of the SFDR.
The FSMA has published a communication to clarify the rules that apply both to companies and to products, as well as the expectations of the FSMA in this regard.
Please get in touch if you want to check-out whether you are SFDR compliant. We will be happy to share with you our ESG checklist.
Sustainable Finance Disclosure Regulation
The disclosure obligations apply to financial advisors and financial market participants meaning financial service providers that invest third party funds or that offer financial products. It covers fund managers (managers of alternative investment funds, UCITS management companies and self-managed AIFs and UCITS), insurance undertakings, investment firms and credit institutions providing portfolio management services.
The SFDR introduces additional disclosure requirements to the existing elements of relevant sectoral legislations (AIFMD, UCITS, Solvency II, IDD and MiFID II) both at the legal entity, as well as, at the financial product-level. Some of the disclosure requirements apply regardless if an ESG focus or strategy is applied.
ESG disclosure at legal entity-level
The SFDR imposes to inform the clients by disclosing on the firm’s website:
- the firm’s policies on the integration of sustainability risks in its investment decision‐making process or in its investment advice or insurance advice; and
- remuneration policies which must disclose how that policy is consistent with the integration of sustainability risks.
If the firm has no ESG focus or strategy, this must be disclosed, justified and the firm must indicate when it expects to adopt an ESG strategy. If the firm’s remuneration policy is not consistent with the integration of sustainable risks, this must also be disclosed on its website.
The policies must contain a statement on whether or not principal adverse impact of investment decisions on sustainability factors are considered. If so, a statement on due diligence policies with respect to those impacts, the nature and scale of its activities and the type of financial products which are made available must be added as from 30 June 2021. The impact on sustainable factors must be assessed by using KPIs determined in the Regulatory Technical Standards (RTS) to be adopted by the Commission.
If the in-scope firm does not consider the adverse impact of investment decision on sustainability, its policies must contain information on why such impact is not considered. As from 30 June 2021 large financial markets participants will have to take into account the adverse impact of investment decisions on sustainability factors.
In addition, from 10 March 2021 in-scope firms must amend their relevant pre-contractual information documents to disclose transparency on the following information:
- the manner in which sustainability risks are integrated into investment decisions and advice; and
- the results of the firm’s assessment of the likely impacts of sustainability risks on the returns.
These disclosures must be included in amongst others the prospectus or private placement memorandum or the investment management agreement. Based on the principle “comply or explain”, again this pre-contractual disclosure requirements apply regardless of the firm’s ESG focus. If sustainability risks are considered not to be relevant, the pre-contractual disclosures must include a clear explanation of the reasons therefor.
ESG disclosure at financial product-level
Mandatory disclosures also apply at the level of ESG products. ESG products are UCITS, AIFs, insurance products and portfolios under discretionary and individualised management that promote sustainable investments as an explicit objective (“article 9 products”) or otherwise include the promotion of environmental or social characteristics (“article 8 products”).
- The FSMA expects that prospectuses and pre-contractual information relating to article 9 products or article 8 products will reflect from now on the information required by articles 8 or 9 of the SFDR.
- The categorisation of a product as an article 9 product or an article 8 product must be realistic and consistent with the investment policies adopted.
For public UCITS and AIFs, if the changes made to be compliant with SFDR trigger changes to the investment policies, the FSMA requires the publication of a press release and a one-month period for the investors to exit at no-costs.
The FSMA has provided a list of all the information to be provided in the pre-contractual information to comply with article 8 and article 9 of the SFDR.
What products can be qualified as sustainable?
Only products consistent with article 9 requirements can use the terminology « investissement durable / duurzame belegging / sustainable investment ».
To avoid greenwashing, only article 8 and article 9 products may advertise ESG or sustainable features. If another product has an ESG label, it must clearly mention that it is not an article 8 or an article 9 product.
Any fund which is not an article 9 product may only use the term “sustainable” in its marketing material provided it mentions clearly that it is not an article 9 product.
What’s about the missing RTS?
The disclosure obligations were aimed to be accompanied by Regulatory Technical Standards (RTS) jointly developed by the three ESAs (EBA, EIOPA and ESMA) to offer guidelines on the content, methodologies and presentation of the relevant information to be disclosed under the SFDR. In particular, these RTS focus on disclosure requirements in relation to article 8 and article 9 ESG-products.
Although the RTS were intended to apply from 10 March 2021, the ESAs final report on these “Level 2” Regulatory Technical Standards was only finalised in February 2021. Despite this deferral, firms will however, still have to be SDFR compliant. In a Joint Statement of 25 February 2021 the three ESAs proposed a deferral of the entering into force of the RTS until 1 January 2022. In addition, they recommend the draft RTS be used as a reference when applying the substantive or “Level 1” SFDR requirements provisions of the SFDR in the interim period between the application of SFDR (as of 10 March 2021) and the application of the RTS at a later date. In-scope firms are therefore expected by the FSMA to take into account the draft RTS.
ESG: what’s next?
Not all disclosure requirement provided in the SFDR apply from 10 March 2021. For certain products, additional SFDR pre-contractual disclosures will have to be in place by 30 December 2022. Also, the entering into force of the RTS for certain disclosure obligations is expected to apply as of 1 January 2022.
In addition, as from 1 January 2022 a new wave of obligations will apply with the entering into application of the EU Taxonomy Regulation for the first two environmental objectives (climate change adaptation and climate change mitigation).
Moreover, there are many other projects on the EU’s ESG agenda to further implement the ESG objectives in financial regulation. In that regard draft delegated regulations clarifying the effect of ESG considerations for suitability assessments under MIFID II, Insurance Distribution Directive and UCITS and AIFM Directive are expected to be finalised and/or adopted in the course of 2021.
- Vanessa Marquette, Partner, LOYENS & LOEFF
Compliments of Loyens & Loeff – a member of the EACCNY.