New Sustainability-Related Disclosure Requirements for Fund Managers

New measures aiming at reorienting capital flows towards sustainability and providing investors with more clarity and transparency when investing in “green” products impose new disclosure requirements on fund managers.

Effective from 10 March 2021, AIFMs and EuVECA managers (as well as other financial market participants) shall abide to the disclosure requirements in the new Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability‐related disclosures in the financial services sector (the “Disclosure Regulation”).

The Disclosure Regulation forms part of the European Union’s efforts to reach its climate change mitigation targets by financing sustainable growth originating from the European Commission’s Action Plan of 8 March 2018.

While the Disclosure Regulation applies to all financial market participants, the scope of this article is to outline the effect of the new rules on AIFMs, including EuVECA managers.

1) The Disclosure Regulation

The Disclosure Regulation lays down harmonised rules on transparency with a view to promoting the integration of sustainability risks into investment processes and the disclosure of such risks to investors. The rules stipulate mandatory transparency requirements both at manager level and at AIF level.

While the general disclosure requirements apply to all AIFM and EuVECA managers, additional disclosure requirements apply to managers of:

• AIFs promoting environmental and/or social characteristics (see section 3)
• AIFs promoting sustainability investments (see section 4)

The rules supplement the disclosure requirements laid down in the AIFM-directive, the EuVECA-regulation and sectorial regulations.

Much of the detail of how to address the obligations created by the Disclosure Regulation will be further developed and prescribed by additional regulatory technical standards which will be prepared by ESMA et.al. and adopted by the European Commission during 2020 and 2021.

2) General disclosure requirements

The Disclosure Regulation sets out how managers must disclose certain information to provide greater clarity and transparency to investors.

Websites

All managers shall publish and maintain on their websites, among others, the following information:

• information about their policies on the integration of sustainability risks (i.e. any environmental, social or governance event that could cause a material impact on the value of the investment) in their investment decision-making process;
• where they consider principal adverse impacts of investment decisions on sustainability factors, information on their due diligence policies with respect to those impacts. Where such impacts have not been considered, clear reasons must be stated including if and when these impacts will be considered (comply-or-explain);
• a reference to their business conduct codes and international standards for due diligence and reporting and the degree of their alignment with the objectives of the Paris Agreement; and
• information on how their remuneration policies are aligned with the integration of sustainability risks

Pre-contractual disclosures

All managers shall include the following descriptions in pre-contractual disclosures (i.e. prior to conclusion of e.g. an agreement on investments in an AIF):

• the manner in which sustainability risks are integrated into investment decisions; and
• the results of the assessment of the likely impacts of those risks on the returns.

Where a manager does not deem sustainability risks to be relevant, a clear and concise explanation of the reasons therefor shall be included in the above descriptions.

3) Promotion of environmental and/or social characteristics

Where environmental and/or social characteristics (ESG) of an AIF are being promoted, the manager shall make the following additional pre-contractual disclosures:

• information on how those characteristics are met following good governance practices; and
• if an index has been designed as a reference benchmark: (a) information on whether and how this index is consistent with the above characteristics, and (b) how this index is aligned with the objective from a broad market index.

In addition, such manager shall disclose in the manager’s periodic reports (i.e. annual and/or interim) the extent to which such environmental and/or social characteristics are met.

4) Sustainability investments

Where an AIF has sustainable investments as its objective, the manager shall make the following additional pre-contractual disclosures:

• if an index has been designed as a reference benchmark: (a) information on whether and how this index is consistent with the above characteristics, and (b) how this index is aligned with the objective from a broad market index.
• if no index has been designated: explanation on how the objective regarding sustainable investments.

In addition, such manager shall disclose the following information in the manager’s periodic reports (i.e. annual and/or interim):

• the overall sustainability-related impact of the AIF by means of relevant sustainability indicators; and
• if an index is designated as a reference benchmark: a comparison between the overall impact of the AIF with the designated index and a broad market index in terms of weighting, constituents and sustainability indicators.

5) Sub-threshold managers

The Disclosure Regulation does not distinguish between authorised AIFMs and sub-threshold AIFMs without authorisation but simply states that all alternative investment fund managers within the meaning of the AIFM-directive are considered a “financial market participant” and thus comprised by the disclosure requirements of the regulation.

That being said, the Disclosure Regulation dictates specific channels of disclosure by referencing documentation that is mandatory to authorised AIFMs but not to unauthorised, sub-threshold AIFMs, e.g. remuneration policies and statutory investor information pursuant to article 23 of the AIFM-directive. This does give rise to some uncertainty with respect to the application of some of the provisions on unauthorised, sub-threshold AIFMs. Hopefully, this uncertainty will be clarified prior to the Disclosure Regulation entering into force on 10 March 2021.

Next Step

While the Disclosure Regulation does set out some specific compliance requirements, ESMA and other European supervisory authorities shall now, through the Joint Committee, develop draft regulatory technical standards to specify the details of the presentation and content of the information to be disclosed under the Disclosure Regulation. The European Commission will be responsible for supplementing the Disclosure Regulation with these regulatory technical standards prior to the regulation entering into force.

By 30 December 2022, the European Commission shall evaluate the application of the Regulation and, if appropriate, let such evaluation be accompanied by a legislative proposal.

Mazanti will follow the development of the regulatory technical standards closely to obtain a better understanding of the details of the presentation and content disclosure requirements.

Our Comments

While the requirements set out in the Disclosure Regulation do not apply until March 2021, the new obligations will range from publishing certain information on fund managers’ web sites to an extended scope of pre-contractual information and annual reporting. Therefore, Mazanti recommends that fund managers already now start considering their internal processes for preparation and amendments of relevant policies, implementation of the pre-contractual obligations and ensuring that their websites will be ready for the required publication.