Product Director, Intertrust Group
The EU’s new sustainability-related disclosure regime comes into force in January 2023, creating new challenges for fund managers.
Fund managers offering products linked to environmental and/or social sustainability will have to go much further to show investors that their claims are true.
The Sustainable Finance Disclosure Regulation (“SFDR”) Level 2 requirements will finally come into effect on 1 January 2023, after being postponed twice.
They will take the form of the SFDR Regulatory Technical Standards (RTS), which provide disclosure templates for sustainability-related financial products. The RTS also contains further technical detail regarding entity-level requirements and other in-scope products.
The purpose of the RTS is clear enough. It will give investors improved transparency around sustainability claims made by financial market participants about their products. This allows for easier comparison with other products.
If applicable, the templates will also show how these funds align with the EU Taxonomy, defining which activities can be considered environmentally sustainable.
However, the RTS presents a challenge to fund managers. These detailed, technical disclosures require a range of sustainability-related data to be collected and validated, with adherence to the reporting guidelines.
RTS: what’s happening in January 2023?
Most importantly, the new requirements coming into force in January mean that funds will have to disclose specific sustainability-related information at product level.
There are three relevant product classifications:
- Article 6 products – products with a non-sustainable strategy
- Article 8 products – “light green” products that promote environmental and/or social characteristics
- Article 9 products – “dark green” products, whereby potential investments are screened based on their contribution to the sustainable investment objective of the fund
Financial market participants will have to give products one of these designations in pre-contractual documents, annual fund reports and product-level website disclosures and show why that designation applies.
None of this is entirely new. SFDR Level 1 requirements were introduced in March 2021. The initial regulation included requirements for in-scope funds and entities, but the RTS has provided additional detail regarding the content, methodology and presentation of this information. From January 2023, product-level information will have to adhere to the strict RTS templates, published in April 2022.
What funds should do now to prepare for RTS
Fund managers have decisions to make. They must decide how to classify their products, balancing the obvious benefits of offering sustainable investments with the pressure of extra disclosure obligations.
Most will understand that sustainable products are increasingly important in any management firm’s portfolio.
So, firms have to study the RTS pre-contractual disclosure requirements and apply them accordingly by submitting them to the applicable regulator.
From January onwards, firms will also have to refer to the RTS templates when showing how claims made in pre-contractual documentation have been met.
These results must be published as an annexe to the annual fund reports.
In summary, sustainability disclosures were already required for in-scope products and entities detailed in the SFDR, but as of 1 January 2023, those requirements will be more technical and prescribed.
For managers that have Article 8 products with environmentally sustainable investments and Article 9 products, this new complexity around data collection and reporting could represent a serious administrative burden. Sustainability factors will have to be assessed against key performance indicators (KPIs) determined by RTS.
These fund administrators will have to source and validate data that meets the RTS expectations and show how products align with the EU Taxonomy.
As of the 31 December 2022, they will also have to disclose any principal adverse impacts (PAI) of their investments at product level.
How Intertrust Group can help with RTS
The RTS will make it easier for investors to make informed decisions on sustainable investments based on clear, consistent and comparable information.
However, collecting that information and presenting it correctly will increase pressure on fund managers’ already stretched back-office teams. The RTS puts a new onus on consistent data management and reporting.
Intertrust Group can help:
- As a strategic partner with innovative technologies – including a cutting-edge environmental, social and governance (ESG) platform – combined with global knowledge and experience to deliver added-value services for all asset classes.
- We offer expert guidance on how to take control of ESG data in your portfolio and 24/7 access to performance data.
- Our expert teams harness tools and cutting-edge technologies to eliminate costly errors in handling fund administration and corporate actions, investor relations and portfolio management.
- Intertrust Group has 70 years’ experience providing world-class trust and corporate services to clients around the world. Intertrust Group has been acquired by CSC, the world’s leading provider of business, legal, tax and digital brand services, worldwide.
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