European Commission publishes its responses to long-awaited questions on the application of SFDR

The European Commission has published its long-awaited responses to questions raised by the European Supervisory Authorities in January this year. Whilst some of the responses are helpful, a number of key points still remain unclear. Key takeaways for fund managers are:

Non-EU managers:

• The guidance clarifies that the Sustainable Finance Disclosure Regulation (SFDR) applies to non-EU managers marketing their funds in the EU under the private placement regimes.
• Whilst not expressed, the response implies SFDR is not triggered when a manager relies on reverse solicitation which supports the industry approach.
• The guidance does not specifically clarify whether compliance with SFDR for non-EU managers includes the manager level disclosures as well as the product level. However, the implication is that it does. That said, the response is not clear and when read against responses to other questions there may be room to argue only the product level disclosures apply (which is consistent with the industry interpretation to date). As such, non-EU managers will need to consider their position in this regard. 

Sub threshold managers: Small or sub threshold managers are subject to SFDR, including both manager and product level disclosures.

500 headcount (relevant for determining whether a manager can elect to opt out of the PAI regime): The headcount takes into account employees in group entities based in or outside of the EU.  Whilst it is open to interpretation, it seems that the trigger point for assessing this remains as per the technical language in SFDR (i.e. it only captures parent undertakings which themselves are caught by SFDR).  Further, the response confirms that the disclosure obligations apply at the manager and not the group level.

Article 9 products: The response confirms that Article 9 products should only invest in “sustainable investments”. Article 9 products may invest in certain incidental investments for hedging or liquidity purposes, but this needs to be consistent with the fund’s objective of investing in sustainable investments.

Article 8 products: One of the key areas of uncertainty surrounding SFDR is the definition of Article 8 products (those which promote environmental or social characteristics).  Key points from the Commission’s responses to questions related to Article 8 funds include:

• Helpfully, the guidance confirms that merely integrating sustainability risks into a manager’s investment decisions for a fund will not mean a fund is Article 8, which is consistent with the industry approach.
• The implication from the response is that  “promotion”  means giving an impression that the product considers E/S characteristics in its investment policy goals, targets or objectives. Whilst not clear, this implies a requirement for there to be a commitment to follow these requirements rather than more broadly referring to ESG considerations.
• It seems including words like sustainable/sustainability in a fund name will be sufficient to trigger Article 8.
• Article 8 products may, but aren’t required to, comply with the PAI regime.
• There is an implication that having negative screening shouldn’t turn an Article 6 product into Article 8 provided this isn’t promoted as being linked to E/S characteristics.
• If a fund promotes that it will comply with requirements or restrictions laid down by laws, including in international conventions or voluntary codes, as part of its investment policy, this suggests an Article 8 fund. As such, whilst it is still arguable that there needs to be some binding commitment to invest in this way, the response is not clearly worded and managers will need to review their offering documents (and other marketing materials) carefully to ensure the product they are marketing is correctly categorised.

As expected, SFDR continues to evolve and key areas remain uncertain. Managers should review their position and documents against the guidance and ascertain whether changes to their approach and current disclosures are needed.