How Sustainable And ESG Focused Is Your Fund?

It is an important day for Sustainable & Impact Investing (S&II), also more commonly recognised as ESG – Environmental, Social & Governance – and responsible investment (RI). It marks the beginning of the first significant part of S&II – including ESG – regulation with the introduction of the first level of Sustainable Finance Disclosure Regulation (SFDR).

A special day. Photo: Christian Charisius/dpa (Photo by Christian Charisius)

As of 10 March 2021, Investment Management firms will need to consider several areas and have a plan to demonstrate that their funds are correctly classified if they want to promote their products to European investors and be strategic about their future as a sustainable business.

If you have done your work, there is still more to do and to come, so companies will need to have a plan in place to manage compliance beyond the deadline. 

The good news for those that have compliant products in place at this stage is that they will become the differentiated leaders in the fastest growing area of Investment Management.

In essence, companies interested in becoming leaders have been assessing their current status to build a roadmap targeting the following three objectives:

1. Focus on what they can deliver by the 10 March deadline

2. Create the foundation to build and adapt going forward 

3. Become strategic and commercial beyond the deadlines 

Even if a company has not yet completed all the required steps and actions, this article includes relevant key points to consider and actions to be taken.

I) Disclosure obligations

 The SDFR aims to make a clear distinction between the information to be provided to investors of “ESG funds” and investors in non-ESG funds.

SDFR:Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector.  

ESG Funds: those promoting environmental or social characteristics (not-exclusive) and that invest in companies that follow good governance practices (“Article 8 funds”); and those which have either sustainable investment or reduction in carbon emissions as their objective (“Article 9 funds”). 

The disclosure requirement has implications for:

1. Investors

2. Prospective investors 

3. Funds

4. Management companies

5. Board of directors

II) Main Objective

 The main objective is to combat“Greenwashing”.

The provision of additional information and periodic reporting aims to allow the measurement of success and potential comparison between products.

III) Timeline – Initial deadline

All EU funds and non-EU Alternative Investment Funds (AIFs) marketed within the EU will be required to carry out the relevant actions by 10 March 2021.

Note: Investors must also be provided with significant additional information both before investing in the fund and during the life of the investment through periodic reports and information made available on the website of the management company.

IV) Other considerations

Light or Dark Green: companies may also want to consider this difference when classifying funds;

• LIGHT GREEN = promoting E S or G, but not entirely.

• DARK GREEN =  sole objective is E, S, or G. 

A sustainable Investment from Disclosure regulation perspective is an economic activity that contributes to an objective that can be independently measured by a key resource or efficient indicators. 

So when a company decides on what to promote, they need to take into account the type of reporting required.

Providing the investment does not significantly harm or has an adverse impact, even for light green funds there is still a need to get granular on exposure % composition of E S & G. 

V) Actions  

There are a series of actions that will need to be taken before the deadline and many on an ongoing basis after that.

As a quick checklist of actions required, companies may want to consider the following: 

1. Check the final draft of the Regulatory Technical Standards (RTS) by the The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) on the content, methodologies and presentation of disclosures under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR)
2. Categorise relevant fund(s) and determine whether it pursues an environmental objective or characteristic as explained above.
3. Check RTS for ESG disclosures specific to the prospectus, website disclosure and periodic reports
4. Implement a project plan with key stakeholders and internal procedures in order to gather and provide relevant information 
5. Review existing investment management agreements
6. Prospectus and website disclosures to be prepared and approved
7. Conduct a review of all marketing materials for contradictions
8. Prospectus disclosures to be filed with with the relevant entities and noted Website disclosures to be published by 10 March 2021
9. Internal processes to be put for periodic reporting after 1 January 2022
10. Revise prospectus and periodic reports disclosure to incorporate additional requirements by relevant deadlines  

VI) Other High level considerations

On the most immediate actions, you will want to make sure you have the following areas covered:

1. Timelines 

2. Classification 

• Definitions 
• Inventory
• Reporting

3. Management & Firm

• Website 
• Marketing
• Messaging 

4. Documentation 

• Prospectus 
• Key Investor Information Document (KIID) 
• Reports

5. Reporting 

• Investors 
• Board members

VII) Conclusion

If you have completed all that is required to date, many congratulations, but this is only the beginning.

If you have not completed the requirements, do not despair, but keep working on your plan to become compliant as soon as possible if you want to promote your products in the region. 

Happy and sustainable investing to all.  If you have any questions, please do not hesitate to contact me.