_EU Regulation 2019/2088 of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”) is a major turning point in the pursuit of a greener financial system.
SFDR is part of the European Commission’s Sustainable Finance Action Plan, one of the main objectives of which is to reorient capital flows towards sustainable investments. SFDR therefore lays down harmonised sustainability disclosure obligations for financial market participants and financial advisers operating through the European Union, in order to enable investors to make better decisions on their investments.
While SFDR’s scope of application is very wide - encompassing all financial market participants and all financial products - its implementation is staggered. At present we are awaiting key guidance that will be issued by the European Commission in its Level 2 Regulatory Technical Standards, but the core Level 1 requirements under SFDR must be complied with by 10 March 2021 notwithstanding the delay. These include the requirement for financial market participants to categorise their financial products (either as standard (non-ESG) products, financial products which promote environmental or social characteristics or financial products having sustainable investments as its objective) and make consequential disclosures in offering documentation and on their website.
Please note that if you have a fund that has an offer document stamped by the Commission de Surveillance du Secteur Financier (“CSSF”) then please be aware that there is an earlier filing deadline to implement the necessary documentation changes of 28 February 2021 (see below).
The SFDR Level 1 requirements constitute a challenge for financial market participants and financial advisers, as are required to show that they integrate the sustainability risks in their investment decision-making or investment advice process, and must consider the principal adverse impact (“PASI”) of their investment decisions on sustainability factors; unless they elect to opt-out, in which case they must explain the clear reasons as to why they do not do this.
In practice, what this means is that for each fund that considers the PASI of their investment decisions, there need to be disclosures on:
- the manner in which sustainability risks are integrated into its investment decisions; and
- the results of the manager's assessment of the likely impacts of sustainability risks on the returns of the fund.
The SFDR defines "sustainability risk" as an environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of the investment. It is important to note that this is about sustainability as a risk to financial value, rather than ethical or moral values.
The SFDR document disclosure requirements must be implemented into the offering documents of all types of funds managed by a UCITS management company or an AIFM, no matter when the investment vehicle has been set up (i.e. amendments must be made to the documents of funds established before the entry into force of SFDR).
For more information on SFDR please click here.
To facilitate this document updating process, the CSSF has established a fast track procedure specifically for UCITS management companies and affected AIFMs to facilitate the approval process for document updates reflecting these SFDR requirements. In case of material changes in the investment policy and restrictions, the use of the fast track procedure would not be available. Please note that such procedure is only applicable to UCITS, SIFs and Part II UCI offering documents (so, for example, a RAIF would not need to file an updated offer document, but the update would still need to take place). Each updated offering document submitted for visa stamp shall be accompanied by a confirmation letter and submitted to the CSSF by 28 February 2021, at the very latest.
Should you need any assistance regarding any aspect of SFDR and the EU’s other sustainable finance initiatives, please contact Wildgen’s Investment Funds Practice Group.