Lydia Linna: What is the data collection exercise all about?
Benoît Rose: The SFDR data collection exercise is applicable to investment fund managers (IFMs) and institutions for occupational retirement provision (IORPs) on precontractual disclosures in relation to SFDR and TR (Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment).
IFMs and IORPs are required to include sustainability-related information in the precontractual disclosures of financial products in accordance with SFDR, TR and the SFDR Regulatory Technical Standards (SFDR RTS).
The objective of the current data collection exercise is to collect, in a digital format, information contained in precontractual disclosure documents.
Why is it important for fund firms?
This data collection exercise is mandatory for the following financial market participants:
· Ucits management companies, based in Luxembourg or in another EU member state, in relation to all Luxembourg-domiciled Ucits they manage
· Authorised AIFMs, based in Luxembourg, in relation to all Luxembourg-domiciled regulated and unregulated AIFs (including Eltifs) they manage
· Authorised AIFMs, based in another EU member state, in relation to all Luxembourg-domiciled regulated AIFs, as well as Luxembourg-domiciled unregulated AIFs (only when they qualify as Eltifs) they manage
· Registered AIFMs, subject to Article 3(3) of the Law of 12 July 2013, based in Luxembourg or in another EU member state, in relation to all Luxembourg-domiciled regulated AIFs they manage
· IORPs, subject to the Law of 13 July 2005
The data collection exercise concerns existing pre-contractual disclosures (e.g., in a private placement memorandum or on a website but also other disclosures under articles 6, 7, 8 and 9 of the SFDR).
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What should they pay attention to?
For article 8 or 9 funds under SFDR, information must cover the environmental and/or social characteristics or objectives of the funds. AIFMs must also provide information for other funds relating to sustainability risk and principal adverse impacts (PAIs) pursuant to articles 6 and 7 of SFDR.
The CSSF has specified four questions for funds under articles 6 and 7 of SFDR, which are:
· whether sustainability risks are considered in investment decisions
· whether this has been disclosed in accordance with article 6 SFDR
· whether PAIs on sustainability factors are considered
· if information is disclosed in accordance with article 7 SFDR
For article 8 and 9 funds, the CSSF requests that AIFMs provide all elements of disclosure already provided to investors in the pre-contractual template. As it is standardised, the CSSF provides for various categories to select in answers such as environmental and/or social characteristics.
By means of the list of options in the reporting system, the CSSF gives some guidance on its administrative practice and interpretation on the pre-contractual disclosure requirements, e.g., as the list of environmental and/or social characteristics promoted by an article 8 fund is not exhaustive and it is possible to provide a short description, it seems that such promotion may be interpreted in broad terms.
The list of options to describe the ESG-related investment strategy in the reporting system is based on a list provided by the European Securities and Markets Authority. Again, the list is not exhaustive, and it is possible to provide a short description. It is worth noting that “ESG integration” or “ESG engagement” are options proposed for an article 8 fund.
When it comes to funds with an environmental objective, it is required to select one of the environmental objectives specified in the Taxonomy Regulation and SFDR.
What are the next steps?
The deadline for submission of the initial report is 15 June 2023. A user guide providing clarifications on the content and the format of the information to be reported along with technical details on the data collection process is available on the CSSF’s website.
After the initial submission, IFMs and IORPs must ensure that the information provided is being kept up-to-date and they must update the data reported by means of subsequent declarations in case of changes to the precontractual documents or templates.
Recently, there has been some discussion around sustainability data and the lack of clarity in the SFDR and how sustainability is defined. About 300 funds, for example, were downgraded from article 9 to article 8 in Q4 2022. Could you elaborate a bit on this trend?
Indeed, this is a trend and you probably also refer to a Trackinsight March 2023 note which stated that as many as 70% of article 9 .
For context, the European Commission issued in July 2022 further guidance on article 9 funds, stating that only funds deemed to be 100% sustainable could qualify as article 9. Yet the criteria for sustainable investments remain somehow unclear. Hence, many asset managers are not willing to take any risk of being blamed of greenwashing and prefer to downgrade from article 9 to article 8.
The CSSF’s communication for the data collection exercise is interesting in this respect as it gives some indication on how it understands the scope of article 8 and 9 SFDR in the way it has framed the questions for the data collection.
This interview was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .