In less than two months from now the so-called sustainable finance disclosure regulation (EU 2019/2088) (the "ESG Disclosure Regulation") will oblige (i.a.) fund managers, irrespective of their regulatory status (i.e. sub-threshold registered AIFM, EuVECA AIFM or fully authorized AIFM) and irrespective of their strategy (e.g. conventional VC, ESG or impact) as well as financial advisors to disclose certain information on their website and within fund-related pre-contractual disclosures.
Fund managers and financial advisers are therefore strongly advised to prepare their disclosures as soon as possible. While we have updated you on the background and context of the disclosure regulation in our preceding SMP Funds Briefing, this briefing intends to provide you with an overview of the upcoming disclosure obligations and how to handle them in light of some remaining uncertainties.
I. Manager-related disclosures
As of 10 March 2021, fund managers and financial advisors are required to publish on their websites information about their policies on the integration of sustainability risks in their investment decision-making process (risk disclosure). A sustainability risk means an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment.
In addition, they are required to publish and maintain on their website information on principal adverse impacts of investment decisions on sustainability factors (impact disclosure). Sustainability factors include environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. In short, risk disclosure and impact disclosure look in opposite directions. The risk disclosure covers financial harm ESG risks may do to an investment, whereas the impact disclosure covers the impact of investments on ESG factors.
Fund managers and financial advisors will either have to publish an impact disclosure outlining how principal adverse impacts are considered in their investment decisions, or publish a non-compliance statement, which includes clear reasons for why they do not consider adverse impacts of investment decisions. When choosing between 'comply' and 'explain', especially fund managers should take into consideration market expectations, as many institutional and public investors expect or even require ESG commitments. Depending on the scope and kind of ESG commitments in place, they may already prevent choosing the 'explain' route (i.e. issuing a non-compliance statement). For further details please see our SMP Funds Briefing published on 18 November 2020.
Additionally, although likely not applicable to all, fund managers and financial advisors need to include in their renumeration policies information on how those policies are consistent with the integration of sustainability risks and shall publish such information on their websites, as well as certain pre-contractual information relating to sustainability risks.
II. Fund-related disclosures
Furthermore, the regulation sets out fund-related disclosure requirements for ESG-promoting funds, i.e. funds that either promote, among other characteristics, environmental or social characteristics or sustainable investment funds, i.e. funds that have sustainable investments as their objective. For both types of products extended disclosure obligations apply, including reporting requirements (as of January 2022) and, perhaps most importantly, the quite rigid and potentially demanding framework of the so-called taxonomy regulation (EU 2020/852) will apply (as of January 2022).
While impact funds will most definitely fall within the scope of sustainable investment funds, the question what differentiates a 'conventional fund' from an 'ESG-promoting fund' remains somewhat
uncertain. The European legislator has delivered little guidance on this issue and the draft regulatory technical standards issued by European Supervisory Authorities (ESAs; but their effectiveness postponed by the European Commission, as explained in our previous SMP briefing) include multiple, sometimes contradictory statements. It appears that the ESAs interpret the term quite broadly. Even certain investment restrictions in the form of exclusion lists or general commitments to making the world a better place could already render a fund an ESG-promoting fund. Nonetheless, it seems even the ESAs accept that there are ESG commitments which do not automatically render a fund an ESG-promoting fund. In any case, an individual assessment of existing ESG policies or commitments will be necessary to ascertain whether the fund in question will be considered an ESG-promoting fund.
III. Next steps?
We strongly advise fund managers and financial advisors to revisit their existing and intended ESG policies and commitments in light of the upcoming disclosure obligations and to prepare their disclosures for 10 March 2021. As always, we are happy and ready to help.