EU Disclosure and Taxonomy Regulations – Q&A update

Does SFDR apply to registered/sub-threshold AIFMs and non-EU AIFMs using the National Private Placement Regime?

Yes, SFDR applies to sub-threshold AIFMs for entity and product level disclosures. If the sub-threshold AIFM is not directly subject to the AIFMD disclosure requirements, it should include SFDR disclosures in the analogous documents.

The SFDR also applies to non-EU AIFMs for product level disclosures, as they are included in the definition of “AIFM”. There are no indications of applicability to non-EU managers relying on reverse solicitation.

Must the calculation of the 500-employee threshold to the parent undertaking of a large group be applied to EU and non-EU entities of a group without distinction as to the place of establishment of the group/subsidiary?

The 500-employee criterion test in article 4(3) relates to a Financial Market Participant (FMP) whereas the same test in article 4(4) relates to a large group in its entirety, with the calculation of headcount taking into account the number of employees of a parent undertaking and of subsidiary undertakings regardless of whether they are established inside or outside the EU.

Does the due diligence statement include impacts of the parent undertaking only or must it include the impacts of the group at a consolidated level?

The due diligence disclosure requirement applies to FMPs, adapted to the specific requirements of the parent undertaking and not the group as a whole. The criterion of a group is relevant only for the headcount test.

Must a product to which Article 9(1), (2) or (3) of SFDR applies only invest in sustainable investments as defined in Article 2(17) of SFDR?

An article 9 product may invest in a wide range of assets, only if they qualify as sustainable investments under Article 2(17) of SFDR. It may however invest in other investments for certain specific purposes such as hedging or liquidity if they meet minimum environmental or social safeguards.

Where an EU Climate Transition Benchmark (CTB) or EU Paris-Aligned Benchmark (PAB) exists, is it necessary for a product to track an EU PAB or EU CTB on a passive basis for Article 9(3) SFDR to apply to it?

Where an EU PAB/ EU CTB does not exist, the pre-contractual info must include a detailed explanation of how the effort of attaining the objective of reduced carbon emissions is ensured in view of achieving long term global warming objectives of the Paris Agreement.

If an EU PAB/ EU CTB exists, a financial product must be tracking these.

If previous two questions are affirmative and if the minimum standards of an EU PAB/ EU CTB do not require the index components to be sustainable investments, can the product fall within the scope of Article 9(3) SFDR?

The implementation of minimum standards by benchmark administrators (for the construction of EU CTB Benchmarks and EU PAB) must ensure compliance with Article 17(2) of SFDR.

Can the name of a product, which may include words like “sustainable”, “sustainability”, or “ESG” be considered to qualify a product to be promoting an environmental or social characteristic or to be having sustainable investment as its objective?

Product names or designations are included within the definition of promotion under Article 8 of SFDR.

While a financial product to which Article 8 applies does not need to explicitly promote itself as targeting sustainable investments (within the meaning of Article 2(17) of SFDR) would a reference to taking into account a sustainability factor or sustainability risk in the investment decision be sufficient for Article 8?

If the answer is yes, how can FMPs that disclose mandatory information according to Article 6(1) or Article 7(1) of SFDR ensure that this is not automatically considered as “promoting environmental or social characteristics”.

The integration of sustainability risks is not sufficient for Article 8 to apply to a product.

Must a product to which Article 8 of SFDR applies invest a minimum share of its investments to attain its designated environmental or social characteristic in order to be promoting environmental or social characteristics?

Article 8 of SFDR is neutral as to the design of financial products and does not prescribe the composition of investments/ minimum investment thresholds. It also does not determine eligible investing styles, tools, strategies or methodologies to be employed.

In the absence of active advertising of an environmental or social characteristic of the product, would an intrinsic characteristic of the product, such as a sectoral exclusion (e.g. tobacco) which is not advertised, also qualify as “promotion”?

The term “promotion” under the SFDR has a wide array of examples, from which the Q&A lists a significant number:

direct or indirect claims, information, reporting, disclosures as well as an impression that investments pursued by the given financial product also consider environmental or social characteristics in terms of investment policies, goals, targets or objectives or a general ambition in, but not limited to, pre-contractual and periodic documents or marketing communications, advertisements, product categorisation, description of investment strategies or asset allocation, information on the adherence to sustainability-related financial product standards and labels, use of product names or designations, memoranda or issuing documents, factsheets, specifications about conditions for automatic enrolment or compliance with sectoral exclusions or statutory requirements regardless of the form used, such as on paper, durable media, by means of websites, or electronic data rooms.

In addition, would complying with a national legal obligation, which applies to the financial market participant, such as a ban on investment in cluster munitions, also bring the product into the scope of Article 8 of SFDR?

A financial product can be subject to Article 8 of SFDR if it complies with local environmental, social or sustainability legal requirements (or international conventions or voluntary codes), and that such compliance is promoted in the investment policy.

For portfolios, or other types of tailored financial products managed in accordance with mandates given by clients on a discretionary client-by-client basis, do the disclosure requirements in SFDR apply at the level of the portfolio only or can they apply at the level of standardized portfolio solutions?

SFDR makes no distinction as to whether products are tailored to specific preferences or requirements of end investors or not.

If the disclosure requirements of SFDR apply at the portfolio level, how is it possible to maintain confidentiality obligations to the client in view of the disclosures required, especially the website disclosures required by Article 10 of SFDR?

SFDR website disclosures be made keeping in mind the need to comply with data protection and with client confidentiality, where relevant. If an FMP is using standardised products solutions, transparency of those solutions might be a way to comply with the website disclosures requirements.