At William Fry's 'Sustainable Finance in Practice for Fund Managers' event yesterday, the Central Bank's Director of Securities and Markets Supervision provided specific and detailed commentary on identified shortcomings of Article 8 and 9 funds' SFDR Level 2 disclosures.
The Director's comments on SFDR pre-contractual disclosures (PCDs), the first from the Central Bank since Level 2 measures took effect last January, highlight several new and some reoccurring issues and areas of concern, key of which are summarised below. In acknowledgement of the ongoing processes to amend SFDR, both the Level 1 Directive and Level 2 measures, the Director concluded noting that its findings may be considered as part of those processes but did not rule out domestic clarifications to address the issues in a timelier manner. A workshop with key stakeholders will shortly be hosted by the Central Bank to discuss its findings and identify ways to address Central Bank concerns.
Drawing a distinction between ESG exclusionary screen indices and the environmental/social (E/S) characteristics of funds tracking those indices, the Director highlighted the Central Bank's expectation that SFDR disclosure templates (specifically the question on the environmental/social characteristics of the fund) be completed from the fund's perspective with a positive indication of the E/S characteristics the fund promotes by applying the exclusions embedded in the index methodology.
The Director also spoke to the Central Bank's expected threshold for Article 8 funds. Noting that while the Commission's guidance permits exclusionary strategies in Article 8 funds, the Central Bank does not believe the intention was to water down the Article 8 designation to such an extent that funds with a list of limited investment exclusions should be deemed to be promoting an E/S characteristic. The Central Bank also queries the appropriateness of an Article 8 designation for funds with a low or even zero commitment to E/S aligned investments.
The Central Bank's expectations, many of which have been borne out in regulatory comments on PCDs in new/revised product applications, are likely to be questioned as at least some appear at odds with the Commission's confirmation that Article 8 is neither a label nor does it seek to limit the design of in scope funds' investment strategies or indeed apply minimum criteria to such funds other than the requirement to promote E/S characteristics.
Finding 2 (related to finding 1 above)
Focussing again on index tracking funds, the Central Bank expects such funds to assess the E/S characteristics of investments and not rely solely on the index providers' appropriate implementation of ESG exclusionary screens when disclosing the level of E/S aligned investments of the fund.
Such regulatory expectations are similar to those outlined in the Central Bank's pre-Level 2 guidance on SFDR disclosures which noted the Central Bank's concerns as to the level of detail in disclosures of the consistency of designated indices with fund E/S characteristics. Such disclosures being further undermined, in the Central Bank's view, by statements to the effect that neither the fund nor investment manager would monitor the composition of the relevant designated index against the screening criteria applied on the basis that the index provider is responsible for screening investments in the index.
Addressing a long-standing industry issue when disclosing the split between environmentally and socially sustainable investments, the Director noted the regulatory expectation for such disclosures to be included on a binding basis in PCDs. Furthermore, the Central Bank does not consider the disclosure of an investment range to be meaningful from an investor perspective nor does it consider it adequate to refer in PCDs to such disclosures being available on a website.
A full copy of the Central Bank's speech is available on its website.
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