Asset Management
Asset Management
by Arthur Carabia and Irene Rey
Sustainable finance: buy-side regulatory developments Sustainable Finance Disclosure Regulation (SFDR) Implementation measures postponed to 1 July 2022: After the first wave of implementation of the high-level principles of SFDR on 10 March 2021, the buy side is still waiting for the finalisation and adoption of the implementation measures. These upcoming provisions are expected to set more granular sustainability-related reporting requirements for ESG/impact products (eg investment funds, mandates, pension fund/products and certain insurance products) and those who issue them (asset managers, asset owners and financial advisers). In a letter on 8 July 2021, the European Commission (EC) informed the European Parliament and Council of the postponement of the SFDR Level 2 implementation and that it planned to bundle all of the draft RTS into a single Delegated Act and defer the dates of application by six months to 1 July 2022. These provisions are yet to be finalised by the ESAs, before being endorsed or amended by the EC. Under the ESAs’ proposal for implementation measures, asset managers will have to report at entity level their ESG footprint by assessing all their investments against 18 mandatory environmental and social KPIs and two other ones to be chosen among a list of 46 optional indicators. Reporting against this granular regime will be particularly challenging given that the quantity and the quality of ESG data is not optimal at the moment and these KPIs are also not universally applicable to all asset classes and investee companies (eg commodities, ABS, non-EU and private companies). Beyond the entity disclosures against these mandatory KPIs, which is the most striking novelty introduced by the draft implementation measures, the text proposed by the ESAs introduces mandatory templates to
PAGE 46 | IS S U E 63 | FOURTH QUARTER 2021 | ICMAGROUP.ORG
disclose the sustainability characteristics or objectives of financial products at pre-contractual level and via periodic reports. With these templates, financial market participants will have to disclose (among others) if the product promotes ESG characteristics and/or has a sustainable investment objective, and the share of investments aligned with the EU Taxonomy (calculation methodology yet to be defined). We understand that one of the pending questions slowing down the finalisation of the implementation measures relates to whether or not to include sovereign bonds for the purpose of product taxonomy reporting. Initially expected for the autumn the final proposal from the ESAs may be again delayed. EC’s Q&As on the Level 1 interpretation: The EC also issued, on 26 July 2021, a Q&A on SFDR Level 1 interpretation answering questions raised by the ESAs in a letter issued on 7 January 2021. The Q&A, covers the scope of Article 8 and 9 products, the derogation regime for FMPs with less than 500 employees, and the application to non-EU AIFMs, which is not always straightforward and is unfortunately sometimes subject to interpretation. It indicates for instance that SFDR does not prescribe a minimum share of investments for products to qualify as Article 8 or 9 products, but that the “neutral investments” under an Article 9 product (eg for hedging and liquidity purposes) are subject to “meet minimum environmental or social safeguards”. But these safeguards are not defined by SFDR. The lack of minimum investments to meet the ESG characteristics or sustainable objective of the product has led national regulators to issue or consider local rules to fill this void. In Germany, for instance, the BaFin is consulting on the possibility to require among other things that funds labelled as or marketed as a sustainable investment fund ensure that at least (i) 75% is invested in “sustainable assets” (with a significant contribution made to the realisation of one or more environmental or social objectives), (ii) other environmental or social objectives are not significantly
