Green finance: Two regulations for financial market players

1. REGULATION (EU) 2019/2088

This regulation (EU) 2019/2088 published in the Official Journal (OJ) of the European Union on 9 December, 2019 relates to the publication of sustainability-related information in the financial services sector; hereinafter the SFDR (Sustainable Finance Disclosure Regulation) regulation.

In the autumn of 2020, the European Commission reiterated that the main level 1 rules of the SFDR regulation were not conditional on the subsequent publication of regulatory technical standards (RTS¹). In principle, level 1 rules should come into effect on 10 March, 2021.

Financial market players and advisors, including asset managers and managers of UCITS/AIFs, have to interpret the rule in the best possible way to be in compliance with this SFDR regulation from 10 March, 2021, date when the majority of level 1 measures will be in effect.

One of the first regulatory measures is to describe and explain, in pre-contractual documents, the sustainable investment strategy and the way in which asset managers incorporate sustainability risks in their investment decisions.

For UCITS and AIFs, this information must be included in the prospectus and/or any other presale or pre-contractual document.

In Luxembourg, on 16 December, 2020 the CSSF published a fast-track procedure concerning the updating of investment fund prospectuses. The amended prospectus must be submitted to the CSSF by no later than 28 February, 2021 and must be accompanied by a letter confirming that all the necessary information has been provided and the requested alterations have been carried out and/or will be implemented to comply with the various regulatory deadlines.

Regarding portfolio management companies in France affected by the coming into effect of the SFDR regulation on 10 March, 2021, the AMF, on 20 January, 2021 clarified the relationship between these new obligations and national requirements, and the position-recommendation DOC-2020-03 on information to be provided by collective investment schemes incorporating non-financial approaches.

The AMF doctrine of March 2020 updated in July 2020 remains applicable and must guide financial market players and advisors. It will therefore apply to all collective investment vehicles that incorporate extra-financial criteria within their management and are marketed to a non-professional clientele in France.

At this stage, the AMF is not planning to clarify the definitions in the SFDR regulation. Additional clarifications could be provided at a later date by the European Commission or the European supervisory authorities. Within the EU, the relevant national authorities could also draw on the work undertaken by financial centre associations to publish technical guidelines.

This sustainability-related information required by the SFDR regulation must be taken into account on two levels:

1. At fund management company level, via a publication on their internet site containing information on, in particular, the policy relative to the sustainability risk, remuneration and declaration of extra-financial performance, distinguishing between those that employ more than 500 staff and the others.
2. At financial product level:

• Description, in the prospectus, of the sustainability risk, the negative impact of sustainability as well as clarifications on complying with the sustainability objective.
• Publication, in periodic reports, of information on complying with Environmental (E) and Social (S) characteristics and the promotion of these characteristics to be updated on the internet site. Marketing communication must be consistent with the product’s characteristics.

Regarding products, ex-ante information must be published on the internet site and in the prospectuses. It will have to be confirmed by ex-post information that will be published in the annual report, KIID and marketing communication.

In December 2020, the AFG, French financial management association, published a guide to help decipher the regulations applicable to fund management companies within the framework of sustainable finance. You can refer to that guide.

Of course, the standardisation and harmonisation of the information provided will be reviewed in light of the RTS that are not yet applicable, although a first revised project was published by ESAs² on 4 February, 2021. These RTS should come into effect on 1 January, 2022. The list of mandatory indicators (PAI - Principal Adverse Impacts) has been reduced from 32 to 14 for investments in companies.

For this reason, the coming into effect of some articles of the SFDR regulation has been and/or will be pushed back beyond 10 March, 2021, notably articles 4, 8, 9 and 10.

In conclusion, all fund management companies are concerned by the SFDR regulation, even those that do not have a sustainable strategy. They will have to explain their position and specify it in the publication of information at product level and fund management company level.

2. REGULATION (EU) 2020/852

This regulation (EU) 2020/852 of 18 June, 2020 (hereinafter Taxonomy) aims to encourage sustainable finance by establishing a legal and technical framework. This regulatory taxonomy also aims to help international investors to identify investments that genuinely meet the environmental goals of saving the planet.

The first two environmental targets (climate change mitigation and climate change adaptation) will come into effect on 1 January, 2022.

The other four environmental targets will come into effect on 1 January, 2023:

1. Sustainable use and protection of water and marine resources,
2. Transition to a circular economy,
3. Pollution prevention and control,
4. Protection and restoration of biodiversity and ecosystems.

In practical terms, European Taxonomy defines a list of economic activities and performance thresholds that measure these activities’ contribution to these 6 environmental objectives. It includes 7 macro-sectors and 72 sub-activities. Each economic activity must provide a substantial contribution to one of the six environmental objectives without significantly impairing any of the others.

For example, an activity can be eligible for Taxonomy for these three reasons:

1. It is already a low carbon activity,
2. It contributes to the transition towards a net zero emission economy by 2050,
3. It enables other activities to reduce their CO2 emissions.

While taxonomy creates a classification system so that investors can better recognize “sustainable” products, we are still lacking a universal definition of green investments.

Compliance with the SFDR regulation also necessitates that asset managers and producers/sellers of financial products are able to meet investors’ requirements in a clear manner, whence this need for a universal definition.

In order to monitor the implementation of the SFDR regulation and Taxonomy, the European Commission has provided for the setting up of a platform (art. 20 of Taxonomy) as a tool for controlling and improving sustainability processes for financial market players.

To summarise, act now to be able to meet, as quickly as possible, the expectations set by the European Commission and the new sustainable finance’s regulatory deadlines.

1 RTS: Regulatory Technical Standards
2 ESAs: European Supervisory Authorities - ESMA (European Securities and Markets Authority), EBA (European Banking Authority), EIOPA (European Institute of Public Administration)