ESG Regulation Monthly Round-Up

Principal adverse impact disclosures: whether an FMP that opts out of PAI disclosure at the entity level can still indicate that they consider PAIs under article 7?

The EC has confirmed that it is possible to consider PAIs at the product level, even if an FMP does not consider PAIs at the entity level.

Many FMPs consider PAIs at the product level without complying with Article 4, and indeed Article 9 products (and Article 8 products with “sustainable investments”) need to consider the PAIs as part of the “do no significant harm” test in any case. As such, this response is helpfully in line with the approach that has been adopted by the market to date.

Pre-contractual risk and PAI disclosures for products no longer made available: do the sustainability risk and PAI product level disclosures apply only to new financial products or also to products that existed as of the SFDR’s application date on 10 March 2021?

The EC has confirmed that for existing financial products that were no longer made available to end investors as of 10 March 2021, FMPs did not need to comply with the pre-contractual disclosures but they must comply with the:

• periodic reporting requirements under Article 11; and
• website disclosures under Article 10.

This decision is consistent with the view adopted by the market; pre-contractual disclosure requirements do not apply to existing closed products but periodic reporting and website requirements do apply. This will only bite on Article 8 and 9 products given that Articles 10 and 11 do not extend to Article 6 products. However, this also means that the EC expects FMPs to have undertaken a categorisation exercise of all in-scope products, including those that were not made available to new investors as of 10 March 2021.

New raisings for any funds that were in a closed period as of 10 March 2021 will require SFDR-compliant pre-contractual disclosures. Again, this is consistent with the view that has been adopted by the market.

Scope of Articles 5 and 6 TR disclosures: do Article 8 SFDR products that do not invest in any “sustainable investments” need to make disclosures under Article 6 TR?

Do Article 9 SFDR products with a social objective still need to disclose under Article 5 TR where it subsequently makes environmental sustainable investments?

Article 8 SFDR / Article 6 TR products

The EC has confirmed that FMPs must make disclosures under Article 6 of the TR for all Article 8 SFDR products that promote environmental characteristics, whether or not they invest in economic activities that contribute to an environmental objective (i.e. “sustainable investments” as defined in Article 2(17) SFDR).

Article 9 SFDR / Article 5 TR products

The EC has confirmed that FMPs must make disclosures under Article 5 TR where an Article 9 SFDR product that initially commits to a social objective in its pre-contractual disclosures subsequently invests in economic activities contributing to an environmental objective.

Data

As a reminder, FMPs are required to use reliable data to disclose how and to what extent the investments underlying the financial product are in economic activities that qualify as environmentally sustainable under Article 3 TR. The ECs have:

• confirmed that where FMPs fail to collect such data, the precontractual and periodic product-related disclosures must indicate zero TR-alignment; and
• reiterated that in exceptional cases where FMPs cannot reasonably obtain the relevant data to determine TR-alignment, they can perform complementary assessments and estimates based on information from other sources, but only to only compensate for limited and specific parts of the desired data elements.

This is inconsistent with:

• the views previously expressed by the ESAs that such disclosures were not required for Article 8 products if they do not invest in economic activities that contribute to an environmental objective (i.e. “sustainable investments” as defined in Article 2(17) SFDR); and
• the structure of the template Annex for Article 8 disclosures suggests that TR-alignment disclosures are only necessary for Article 8 SFDR products that make sustainable investments.

We will be monitoring to see how the market responds to these inconsistencies.