On 5 April last, the Commission issued its third SFDR Q&A with responses to questions raised by the ESAs last September and revisions to certain previous Q&A which did not align with the positions now being set out in the latest Q&A, as summarised below.
- Article 9 funds with a carbon emission reduction
objective are not required to track a PAB/CTB: the
Commission's first, July 2021 Q&A has been amended and
reissued to remove guidance for Article 9 funds with a carbon
emission reduction objective to track a Paris-aligned or Climate
Transition Benchmark (PAB/CTB), which has been replaced by a
clarification that SFDR does not prescribe any single methodology
to account for sustainable investments.
- PAB/CTB trackers deemed to have a sustainable
investment objective: in a new Q&A, the Commission
clarifies that Article 9 funds with a carbon emission reduction
objective have discretion as to the investment strategy used to
achieve that objective and such funds, whether passively or
actively managed, are subject to Article 9(3). However, where a
fund seeks to achieve a carbon emission reduction objective by
tracking a PAB/CTB, the fund will not be subject to Article 9(3)(2)
disclosure as it is deemed to have a sustainable investment
objective. Article 9(3)(2) requires a detailed explanation of how
the continuous effort to achieve the fund's objective is
ensured in view of the Paris Agreement objectives. Only funds which
do not passively track a PAB/CTB are subject to this disclosure
rule and are therefore required to explain why the fund is
considered to have a sustainable investment objective and also to
make required Level 2 disclosures explaining the extent to which
the fund complied with the methodological requirements for PAB/CTBs
under the BMR. Notably, while the Q&A confirms that PAB/CTB
trackers are deemed to have a sustainable investment objective,
challenges may remain for such funds' completion of SFDR Level
2 disclosure templates in circumstances where index providers are
not subject to equivalent disclosure obligations.
- Fund managers are responsible for sustainable
investment methodologies: despite detailed interpretative
queries from the ESAs, the Q&A does not further specify the
definition of sustainable investments under SFDR. Instead, the
Commission confirms the responsibility of fund managers to develop
their own methods for assessing sustainable investments, noting
that SFDR does not prescribe any 'minimum requirements' for
the contribution, do no significant harm, or good governance
requirements for sustainable investments. The Commission also
clarifies that, despite the reference to sustainable investments as
investments in 'economic activities' under SFDR, it is
possible to apply the sustainable investment test at the level of
an investee company and not only at the level of its specific
activities. This clarification issued in response to the ESAs'
question of how an investment in a company can be a sustainable
investment where, for example, the company has one activity, among
several other activities, that contributes to an environmental or
social objective. This Q&A largely maintains the status quo
with fund managers continuing to be responsible for constructing
sustainable investment methodologies and absent any additional
guidance from legislators/regulators.
- Article 8 funds can target carbon emissions reductions
as an environmental characteristic: similar to the Article
9 clarifications, the Q&A confirms that SFDR does not limit the
investment strategies available to funds in scope of Article 8. As
a result, Article 8 funds' environmental characteristics may
target reduced carbon emissions, although the Commission notes that
investor disclosures for such a fund should not mislead investors
into thinking that the target equates to a sustainable investment
objective for the fund.
- Product-level PAI consideration includes identification
and mitigation: fund managers that comply with
entity-level PAI consideration rules under SFDR Article 4 must
disclose whether and, if so, how PAIs are considered for relevant
underlying products. In response to the ESAs request for
clarification of the term 'consider', the Commission
confirms that product-level PAI disclosures must include both a
description of the PAIs and the procedures in place to mitigate
those impacts.
- Calculation of 500-employee threshold for mandatory
entity-level PAI consideration rule: the Commission
confirms that the term 'employee' is not defined under SFDR
and must therefore be determined by reference to the definition set
out in applicable national law.
- Periodic product-level disclosures required only annually by investment firms: while periodic disclosures by investment firms for Article 8 or 9 products are required to be included in the quarterly client report issued under relevant MiFID rules, as SFDR only requires such disclosures to be made annually, they need only be included in every fourth client report issued under MiFID rules.
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