Three clarifications regarding the interpretation of the Sustainable Finance Disclosure Regulation ("SFDR") have been made during Q2 of 2022.

The EU Commission and the European Securities and Markets Authority (“ESMA”) published a Q&A concerning certain questions of interpretation regarding the SFDR on 25 May 2022.

Firstly, the EU Commission stated in the Q&A that the duty to publish website disclosures and periodic reporting disclosures applies to all funds. This includes funds where no new investors were taken in and where no increases in commitments from investors was made after 10 March 2021. For funds that are closed however, the duty to update pre-contractual information no longer applies.

Secondly, the EU Commission stated that any manager opting out of the principle adverse impact (“PAI”) consideration at entity level (i.e., at manager level) may still consider PAI at a product level (i.e., at fund level).

With this in mind, managers should ensure that closed funds are categorised under the SFDR, meaning that the fund should be placed in the category of either article 6, 8 or 9. In addition, website disclosures and periodic reporting disclosures should be considered for all funds.

ESMA published a supervisory briefing on 31 May 2022 regarding the SFDR and the Taxonomy Regulation. The briefing outlines recommendations to the National Competent Authorities (“NCAs”) regarding their supervision of financial market participants under the SFDR and the Taxonomy. It refers to the regulatory technical standards that enters into force on 1 January 2023.

The briefing promotes a risk-based approach to supervision. The intensity and frequency of the sustainability related supervision of investment funds is determined based on the assessment of the risks affecting these funds. Concerning pre-contractual disclosures for funds categorised under article 8 or 9, the briefing states that it is likely that NCA’s will prepare checklists to assist them in verifying compliance with disclosure requirements. The briefing also includes for use by the NCA’s, a list of matters that is suggested to be highly relevant in this regard.

Permian assumes that the NCAs will focus on funds/managers where they assess there to be the greatest risk for greenwashing. Permian also notes that the NCAs have previously informed that they will start reviewing article 9 funds, which is in line with such risk-based approach.

On the subject on how to ensure a sufficient alignment with the SFDR, certain specific recommendations for the funds can be extracted from the briefing:

• As marketing materials are likely to be reviewed by NCA’s, the funds should ensure that marketing materials and fund documentations are aligned when it relates to ESG disclosures.
• To ensure that disclosures are sufficiently clear and not misleading, cross-references and hyperlinks should be avoided.
• In the cases where a fund has a sustainable investment policy, such policy should be included in the fund documentation and the sustainable objectives or characteristics should be clearly identified.
• Although the proportion of non-financial characteristics as criteria for the selection of underlying assets are an important part of the information provided to investors, only the characteristics clearly included in the investment decision-making process should be part of the disclosure.

As all authorised fund managers are required from 1 August 2022 to integrate sustainability risks in their portfolio, risk management processes and overall governance structure, the briefing encourages the NCAs to ensure a clear verification of compliance with these requirements. Thus, authorised funds should place a reasonable focus on the manner in which sustainability risks are integrated in their investment decisions.

Lastly, the briefing states that article 8 and 9 funds should ensure that there is in place a policy to assess good governance practices.

The European Supervisory Authorities (“ESA’s”) published a statement providing clarifications on the SFDR regulatory technical standards (“RTS”) on 2 June 2022. The clarifications covered the following aspects of the RTS:

• use of sustainability indicators;
• principal adverse impact (PAI) disclosures;
• financial product disclosures;
• direct and indirect investments;
• taxonomy-related financial product disclosures;
• “do not significantly harm” (DNSH) disclosures; and
• disclosures for products with investment options.

Permian notes that the RTS are likely to enter into force 1 January 2023, presently depending on whether EU Parliament choose to exercise their right to oppose the implementation. Since the RTS includes more detailed disclosure obligations that the SFDR, this means that many fund managers will need to update their website disclosures ahead of 1 January. We recommend that ESA’s statement is taken into account when updating disclosures in accordance with the RTS.

Contacts:

Anna Berntson Petas: anna.berntson@permian.se

Kristina Ekkeren: Kristina.ekkeren@permian.no