Asset Management and Investment Funds
The implementation of the Sustainable Finance Disclosure Regulation (“SFDR”) and the Taxonomy Regulation continue to dominate the agenda for fund managers.
There has been a number of significant developments since our Spring Horizon Tracker in this space, including: the Commission’s adoption of the regulatory technical standards (“RTS”) providing detailed requirements and mandatory templates for SFDR / Taxonomy Regulation disclosures; the publication of the European Supervisory Authorities’ (“ESAs”) updated supervisory statement, the Commission's Q&A, the European Securities and Markets Authority ("ESMA") supervisory briefing and further clarifications from the ESAs on the RTS; and continuing engagement with the regulators in relation to the implementation challenges.
Managers are also preparing for the August 2022 deadlines for the integration of sustainability risks by fund management companies required by delegated acts under the UCITS Directive and Alternative Investment Fund Managers Directive (“AIFMD”) and new requirements relating to identifying sustainability preferences under MiFID II. These developments are addressed in further detail below.
Themes in Asset Management and Investment Funds
On 6 April 2022, the Commission adopted the final RTS under the SFDR, including five annexes setting out the mandatory templates for principal adverse impact reporting (Annex I) and pre-contractual and periodic disclosures by Article 8 and Article 9 SFDR funds (Annex II, Annex III, Annex IV and Annex V).
There have been no substantive changes since the publication of the ESAs’ final report on the RTS in October 2021. Many of the requirements that apply to pre-contractual and periodic disclosures have been removed from the operative provisions of the RTS but have been retained in the mandatory reporting templates. The changes to the mandatory templates are minor and relate to the explanatory text intended to guide the disclosures. The principal adverse impact statement template has been amended to include a new column requiring managers to state what actions they have planned and targets they have set by reference to each indicator.
The RTS will now be subject to a three-month objection period (extendable to six months) by the European Parliament and Council of the EU. The drafts must either be adopted in their present form or rejected in their entirety, which seems unlikely at this stage. The RTS are expected to apply from 1 January 2023.
“Fund managers should move now to familiarise themselves with the RTS and mandatory templates and prepare for compliance in advance of the January 2023 deadline”.
Shay Lydon, Partner, Asset Management and Investment Funds
There has been a flurry of guidance on implementing the sustainable finance framework in the past quarter.
The long-awaited updated supervisory statement on the application of the SFDR (“ESAs’ Supervisory Statement”) was published at the end of March, followed by the Commission's Q&A responding to the ESAs' queries on 25 May 2022, the ESMA Supervisory Briefing on 31 May 2022 and the ESAs' clarifications on the RTS on 2 June 2022. The various documents provide some useful clarifications, although there are also some new interpretations of the legislative provisions provided by the Commission and ESMA, which are not aligned with previous statements, that may require fund managers to revisit their approach to implementation.
Industry has continued to engage with the Central Bank in relation to the implementation challenges. At a meeting in early April between Irish Funds (including Head of our Asset Management and Investment Funds Department, Tara Doyle) and the Central Bank, the initial feedback on the Central Bank’s spot checks on submissions received via the streamlined process for filing of SFDR and Taxonomy disclosures in late 2021 was discussed.
“It is a challenge for both industry and regulators to digest the various pieces of guidance being published, which in some respects will require fund managers to adapt the approach they have taken to date. The shifting sands are not ideal with just seven months to go until the 1 January 2023 RTS application deadline.”
Tara Doyle, Matheson Chair and Partner, Asset Management and Investment Funds, Chair of the Irish Funds ESG Sustainability Working Group
The Central Bank’s current intention is to prepare a report summarising the findings of its sample review, which will take into account the Commission Q&A and the ESMA Supervisory Briefing. The Central Bank also intends to progress a thematic review of fund managers’ implementation of the requirements later this year, which will be informed by the sample review and the published report.
Amending delegated acts under the UCITS Directive and the AIFMD are due to apply from 1 August 2022.
The delegated acts are designed to complement the requirements set out in the SFDR and the Taxonomy Regulation and seek to integrate sustainability risks and considerations into the UCITS and AIFMD frameworks. Fund managers will be required to:
- integrate sustainability risks in the management of their funds;
- consider potential conflicts of interest arising as a result of that integration;
- take sustainability risks into account as part of the due diligence in the selection and ongoing monitoring of investment; and
- update risk management policies to include details of procedures to manage sustainability risk.
An amending delegated act under MiFID II, which applies from 2 August 2022, will mean that investment firms providing financial advice or portfolio management will have to obtain information about their clients’ sustainability preferences as part of the suitability assessment. As a result of these amendments, the European Securities and Markets Authority (“ESMA”) launched a consultation on changes to its guidelines on certain aspects of the MiFID II suitability requirements, which closed on 27 April 2022. ESMA expects to publish a final report on the final guidelines in Q3 2022, unfortunately after the application date of the delegated act.
“The misalignment between the timing of the MiFID II delegated act on sustainability preferences, which requires a client to confirm whether they wish to invest in Taxonomy-aligned investments or investments which consider principal adverse impacts on sustainability factors, and the RTS under the SFDR presents a significant implementation challenge for fund managers”.