Asset Management & Investment Funds: EU & International Developments - Feb 2021

Sustainable Finance Disclosures Regulation - regulatory technical standards

The European Supervisory Authorities (ESAs) issued their final report on the RTS under the Sustainable Finance Disclosures Regulation (SFDR) dated 2 February 2021. These draft RTS were due to be in place under SFDR by 30 December 2020, but were delayed. The final report reflects the responses to the consultation paper issued in April 2020. The ESAs propose that the RTS will become effective on 1 January 2022. This date, and the final content of the RTS themselves, will be known with certainty when the European legislative process completes. 

The RTS under SFDR can be grouped into two broad categories: 

  • adverse impact reporting at entity level
  • pre-contractual, website and periodic product disclosures, including provisions on "do not significantly harm"

Entity level website principal adverse impact (PAI) reporting

The RTS sets out details about the sustainability indicators in relation to adverse impacts on climate and other environment-related environmental adverse impacts, in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. The mandatory reporting template, which prompted much stakeholder feedback in the consultation process, is set out at Annex I. In response to that feedback, there are now fewer core mandatory indicators and more opt-in indicators. The ability to include narrative elements has increased, for example "actions taken" is a new field in the template.

Entities opting-in to report or large entities unable to opt-out must report on 30 June every year by reference to the previous calendar year. The first PAI statement under the RTS must be reported on 30 June 2022, but will not be by reference to a reporting period. The first reporting period will be on 30 June 2023 by reference to a reporting period of the calendar year 2022.

FMPs opting-in to the PAI statement from 10 March 2021, must comply with the high-level requirements of A4 SFDR, not the draft RTS. Where FMPs do not consider principal adverse impacts, they must state this on their website by 10 March 2021. Under article 7(2) there must also be pre-contractual disclosure to this effect.

Do no significant harm (DNSH)

Compared to the consultation paper, the draft RTS in the final report have added an additional requirement to the DNSH provisions throughout. For example in the PAI template in Annex I the DNSH reporting must show whether the investments are aligned with international standards such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. 

The objective is to bring the DNSH disclosures under SFDR in line with the minimum safeguards in the Taxonomy Regulation.

Product level pre-contractual disclosures for "light-green" and dark-green" funds

The draft RTS now contain the pre-contractual disclosure templates for light-green and dark-green funds. The template is based on those circulated last October by the ESAs with some modifications. For example, DNSH consideration is a new disclosure requirement. The ESAs reiterated the difficulty in designing one template disclosure for the wide range of products on scope of the SFDR and explain why they have settled on mandatory templates with detailed disclosure. If the RTS become effective on 1 January 2022, these disclosure templates will be required from then as an annex to AIF and UCITS prospectuses or supplements.

Product level website disclosures

Financial products classified as "light green" and "dark green" must make product disclosures on the FMP's website. The draft RTS sets out the detail of this disclosure. For 10 March 2021, FMPs must comply with the high-level SFDR requirements in Article 10, not the RTS. DNSH provisions are included in the draft RTS. The disclosure of direct versus indirect investments has been moved from pre- contractual and periodic disclosures to the website disclosure.

Product level periodic disclosure

The mandatory reporting templates for inclusion in financial statements have been included in the draft RTS in the Final Report. Detail is required including a historical comparison covering up to five reference periods and disclosure of the top 15 investments during a reference period. DNSH provisions similar to the pre-contractual templates are required. If the RTS become effective on 1 January 2022, the periodic reporting requirements need to be complied with from that date. This means that FMPs will need to include the template in financial statements drawn up in 2022.

The ESAs published a joint supervisory statement on SFDR. The ESAs recommend that the draft RTS be used as a reference when applying the provisions in the interim period between the 10 March 2021 application date and the application of the RTS (proposed for 1 January 2022). The supervisory statement includes some guidance on the application timelines for some provisions of the SFDR. The ESAs expect to publish a consultation paper on taxonomy-related product disclosures connected to the SFDR in March 2021.

You can read more on this topic in our In Focus paper here.

PRIIPs KID

Amendments to the PRIIPs Regulation in the form of draft Regulatory Technical Standards (RTS) look set to be in place from 1 January 2022 and a further review of the PRIIPs Regulation itself should be completed in the first half of 2022. If the RTS are implemented in their current form, UCITS will be required to provide a PRIIPs KID to retail investors from 1 January 2022.  The UCITS Directive would need to be amended before then to avoid a legal requirement to provide both a UCITS KIID and a PRIIPs KID to UCITS retail investors.

The final report of the ESAs on amendments to the PRIIPs KID (dated 20 July 2020) was submitted to the European Commission for adoption on 3 February 2021. The delay permitted the EIOPA board of supervisors to further analyse the RTS and support the proposal on the basis that the review of the PRIIPs Regulation planned for 2022 will be thorough and include assessment of:

  • how to achieve better alignment between PRIIPs, Insurance Distribution Directive and Markets in Financial Instruments Directive II regarding provisions on costs disclosure
  • the scope of products as foreseen by the PRIIPs Regulation
  • how to ensure that the KID contains the key information necessary for retail investors while avoiding too much or too complex information for these investors
  • how to allow the creation of a digitised KID allowing layered information and reviewing the default paper basis of the KID, taking into account the specific challenges for different types of products (e.g. multi-option products (MOPs))
  • the need for a more tailored approach, such as for MOPs, in order to maximise understanding and use of the information, while continuing to allow for comparability of similar products

If adopted by the European Commission, the RTS would be subject to non-objection by the European Parliament and the Council of the European Union.

UCITS will have to wait:

  • until this European legislative process is complete to be sure that UCITS will be required to provide a PRIIPs KID to retail investors from 1 January 2022 and
  • until the amendments to the UCITS Directive have been made to be sure if the obligation to prepare a UCITS KID has been removed before 1 January 2022 

It is also hoped that clarification as to whether a UCITS KIID or PRIIPs KID is required for professional investors in UCITS will be given by then.  AIFs who currently provide PRIIPs KID to retail investors will need to familiarise themselves with the changes set out in the RTS, discussed in our earlier briefing, and incorporate those changes into the PRIIPs KID in time for the implementation date of the RTS.

You can read more on this topic in our In Focus paper here.

ESMA proposal for ESG ratings

ESMA wrote to the European Commission setting out its proposal for a legislative framework for

  • a common legal definition of an ESG rating
  • a registration and supervision systems for ESG rating providers
  • specific product requirements applicable to the ESG ratings provided

Cross-border distribution of funds

ESMA published a final report on implementing technical standards (ITS) under the Regulation on cross-border distribution of funds. The final report and draft ITS largely reflect the original consultation proposals. The ITS focus on

  • the publication of information by NCAs on their websites about the national rules governing marketing requirements for funds, and the regulatory fees and charges charged by NCAs in relation to fund managers' cross-border activities
  • the notification of information by NCAs to ESMA for the purpose of developing and maintaining an ESMA central database listing UCITS and AIFs marketed cross-border
  • the publication of information by ESMA on its website

The European Commission shall decide whether to adopt it within three months. The new cross-border distribution of funds regime is scheduled to go live on 2 August 2021.

You can read more on this topic in our In Focus paper here.

ESMA report on exposures of AIFs to commercial real estate markets in the EU

ESMA published data on exposures of AIFs to commercial real estate (CRE) markets in the EU as of 31st December 2019.

At the end of 2019, 2407 AIFs were pursuing a CRE strategy of which 1943 were AIFs marketed and/or managed by authorised EU AIFMs (Net Asset Value of EUR 504bn). Within this sample, 1638 AIFs were pursuing primarily a CRE strategy and 305 AIFs were pursuing partially a CRE strategy. 

European Long Term Investment Funds (ELTIFs)

ESMA sent a letter to the European Commission consultation on the review of the European Long Term Investment Funds (ELTIF) Regulation. ESMA proposes improvements in the following areas:

  • eligible assets and investments
  • authorisation process
  • portfolio composition and diversification
  • redemptions
  • prospectus and cost disclosure

For more information please contact a member of the Asset Management & Investment Funds team.

Date published: 26 February 2021