‘Clock is ticking fast’ for EU-linked funds

The SFDR requires all ‘financial market participants’ to make various ESG (environmental, social and governance) disclosures at both entity and product level, even for mainstream products that do not have specific ESG or sustainable finance objectives.

‘All entities managing EU products or distributing products to EU clients are caught,’ said Ali Cambray, ESG and climate change lead at PwC Channel Islands.

‘Of specific relevance for the Channel Islands, the requirement captures Alternative Investment Fund Managers marketing Alternative Investment Funds into the EU through National Private Placement Regimes.

‘Financial advisors are also caught, if advising on SFDR products. And the clock is ticking fast now, with first disclosures required from 10 March 2021.

‘Here at PwC Channel Islands, we estimate there are well over 200 funds across the islands which operate under NPPRs and that are caught by the SFDR as a result.

‘Many will be operating as part of wider EU group structures and are likely to be well prepared. But others may still not be aware of the implications and may have some work to do to reach compliance in the coming months.’

The ESG expert said in particular, the so-called ‘level 2’ disclosures could be complex and would likely drive significantly enhanced data and reporting requirements for many.

‘We are certainly seeing a significant uptick in enquiries and requests for support, both in the Channel Islands and in the UK, where financial market participants are also now caught despite not onshoring the SFDR directly post-Brexit. The SFDR disclosure requirements are various, at both entity and product levels, with different implementation dates and enhanced requirements for ESG and sustainable finance products.’

She also said uncertainty in the industry had not helped matters, with the European Supervisory Authorities writing to the European Commission last month to request further clarification about the treatment of non-EU AIFMs.

‘The commission is widely expected to uphold the current position. We are also seeing an interesting broader trend, with SFDR compliance becoming the de facto good practice standard. Asset managers and funds outside the EU, that are not formally caught, are still choosing to make SFDR-aligned disclosures in response to pressure from investors and LPs. We think that trend is only likely to accelerate as the SFDR beds in.’

Key requirements of the EU sustainable finance disclosure regulation:

●From 10 March, all in-scope entities should disclose on their websites how they integrate sustainability risks into their policies, and how their remuneration policies are consistent with this integration.

●Financial market participants should also disclose on their websites from 10 March, on a comply or explain basis, due diligence policies with respect to principal adverse impacts on sustainability factors.

Larger entities (more than 500 employees) have until 30 June, but must comply.

● By 30 December next year, product level disclosures should be made in pre-contractual information and periodic reporting regarding principal adverse impacts on sustainability factors.

●From 10 March, mainstream products should include a disclaimer stating how the product integrates sustainability risks, or why these risks are not deemed to be relevant in pre-contractual disclosure information.

Products with ESG or sustainable investment objectives are also required to make disclosures from 10 March and reporting requirements aligned with a sister taxonomy regulation from January 2022.