Updated SFDR Q&A Published

The European Supervisory Authorities (EBA, ESMA and EIOPA – together, the ESAs) recently published an updated consolidated Q&A on the practical application of the Sustainable Finance Disclosure Regulation (SFDR). The additional responses provide guidance on the implementation of SFDR including clarification on website disclosure and look-through status (in particular for sustainable investments) which will be particularly relevant for fund-of-funds managers.

Key points for Fund Managers 

Website Disclosures

The Q&A confirms the requirement that a registered fund manager (also known as a sub-threshold manager) should ensure that the SFDR website disclosure is included on its website or a website of the group to which the manager belongs provided it corresponds to the website of the registered manager.  This applies even if the registered manager doesn’t have a website (i.e. it would need to set up a website to comply with this obligation). 

The information must also be easily available to its investors, kept up to date and clear explanations should be provided for any changes to the information. Whilst the response relates to registered managers, this sets the regulator’s expectation for all managers. Interestingly, the response did not say the disclosure had to be included on a public part of a website, provided it is easily accessible to investors. We think it is still arguable in a private fund context to include it behind a password protected part of a website. 

The Q&A also confirmed that the website disclosure should also include the pre-contractual disclosure as well as the latest periodic report. Again for private funds, this information may be sensitive and another reason to support the argument the disclosure should be included behind a password protected part of the manager’s website. 

PAI Disclosures

The updated Q&A includes several responses regarding PAI disclosures providing confirmations on the calculation of PAI. One response confirms that when managers aggregate the adverse impacts, or their investments are in other financial products, the manager should look through to the underlying investments that are causing GHG emissions (PAI indicator 1) which is particularly relevant for Article 8 or 9 fund-of-funds considering PAI.

The Q&A also confirmed that in relation to PAI indicator 4 ‘Exposure to companies active in the fossil fuel sector’, this is to be calculated on a pass/fail basis, and a company active in the fossil fuel sector is any company which derives any revenue from any activities within the definition. 

Sustainable Investments

Helpfully, the ESAs clarify that if a fund invests into other funds that make sustainable investments, the manager can refer to the documents of the underlying fund. However (and less helpfully) the manager should conduct its own due diligence to ensure the underlying investments comply with the requirements for a ‘sustainable investment’ as defined in SFDR and that the underlying investments meet the criteria set by the manager for its sustainable investments.

This look through obligation is particularly difficult for Article 8 funds which make sustainable investments and Article 9 fund of funds.  The obligation to confirm compliance around sustainable investment rests with the manager (and not any delegated portfolio managers). 

Good Governance Practices

The ESAs clarify that holding companies and SPV’s which hold real assets such as real estate do not require good governance checks required under SFDR.

Sustainability Risks

The Q&A confirms that if a manager considers sustainability risks to be irrelevant for its investment decisions in relation to a specific product under Article 6(1) SFDR, the manager must still comply with sectoral obligations in EU legislation such as the obligation for a manager to take into account sustainability risks when complying with their due diligence obligations under AIFMD. This is more relevant for EU managers.

Conclusion

Whilst there is some uncertainty around SFDR, the updated consolidated Q&A provides clarifications which should help fund managers navigate the practical application of SFDR. However, certain areas, including the look through requirements for sustainable investments are less helpful and, given the uncertainty of the future of SFDR, will be less helpful for managers. 

Eloise Edwards-Hedges, paralegal, also contributed to this article.

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