EU, UK ESG fund disclosure update

A) EU sustainable finance disclosure regulation latest

1. Latest SFDR legal predictions

a) Long-term SFDR Level 1 amendments

As the departing European Commission (EC) approach their end of term, work continues on the ‘comprehensive assessment’ of the current SFDR legal framework.

This week, the Greenwashing reports published by the European Supervisory Authorities [i.e. ESMA, EIOPA and EBA] all refer to an imminent ‘joint statement on the SFDR assessment’; this follows the EC’s July 2022 request for the ESAs to submit their ‘Proposals for improvement of the regulatory framework’.

Any changes to the current SFDR Level 1 regime remain for the next EU Commission to decide, once appointed after the EU Election process (i.e.  remit starting from 1 November 2024).

Hence, most experts now assume:

• Draft ‘SFDR II’ Level 1 proposals are unlikely to appear until late-2024 / early 2025;
• Finalised legal text is not expected to apply until 2027-2028 (i.e. depending on the duration of the EU ‘trilogue’ process).

b) Interim SFDR Level 2 updates

Separately, the EC’s adoption of the draft SFDR ‘Level 2’ technical specifications (delivered by the ESAs last December), remains unresolved.

Although the outgoing Commission’s remit will end on 31 October, there remains no interim target date for them to adopt the ESA’s proposed 126-pages of sustainability disclosure changes.

The decision could be passed over to the incoming Commission, who would also be responsible for securing co-approval from the new EU Parliament and Council, to enable legal publication.

At this stage, 1 January 2026 seems a sensible placeholder for the L2 RTS legal application date, given the EC’s reported willingness to provide “at least one year” for transition.

As always, this remains for the EU authorities to officially confirm (in due course).  More to follow.

B) Other EU-ESG developments

1. ESMA publish final ESG fund naming rules

On 14 May, ESMA finalised their ‘Level 3’ Guidelines on funds’ names using ESG or sustainability-related terms.

These will apply to fund names using terms related with the following words: ‘Transition’, Social’, ‘Governance’,  ‘Environmental’, ‘Impact’ or ‘Sustainability’.

Ongoing, funds using any of these naming terms must deploy:

• A minimum threshold of 80% of investments, to meet respective promoted environmental /social characteristics, or sustainable investment objective; plus
• Specific exclusion criteria, pertaining to either Climate Transition Benchmarks [CTB] or Paris-aligned Benchmarks [PAB]).

Moreover, any fund using ‘Sustainability’- related naming terms will be expected to invest “meaningfully” in ‘sustainable investments’ (per SFDR L1 legal definition).

Once ESMA’s final UCITS / AIF guidelines are published in all EU official languages:

• NCAs will have two months to confirm their intent to comply with the guidelines;
• The guidelines will apply three months after EU multi-lingual publication;
• All new funds launched after the application date are then expected to comply immediately;
• Pre-existing products have an additional six-month transition period.

2. CSSF: early adopters of ESMA fund naming rules

On 15 May, the CSSF in Luxembourg published a prompt communique, giving fund managers advance notice of their intent to oversee ESMA’s ESG naming guidelines.

The CSSF also highlighted:

• ESMA’s guidelines will apply to firms managing UCITS or AIFs, “irrespective of whether they are disclosing under Articles 6, 8 or 9 of SFDR”;
• their expectation that firms self-assess the applicability of the guidelines to their managed products, “to ensure compliance of fund names” within the time available.

NB: a reminder that certain fund name change cases (e.g. linked to revised investment objectives/strategy) may require not only pre-notifications and amended disclosures, but also updated legal documents and investor consent.

3. ESMA publish EU Greenwashing analysis findings, actions

“Effective and consistent supervision of sustainability-related claims is critical to investor protection and a trustworthy environment for ESG markets.  I remind all market players of their responsibility to avoid making unsubstantiated sustainability claims and to communicate any sustainability-related information in a manner that is fair, clear and not misleading.”
Verena Ross, ESMA Chair (4 June 2024)

Two years ago, the EC requested each of the three ESAs to deliver their advice on actions required to mitigate greenwashing risks, across the ‘sustainability investment value chain’ (SIVC).

This week, ESMA published their final Greenwashing report. This 82-page document offers an updated ‘cross-cutting’ assessment of current efforts by the EU national competent authorities (NCAs). These are presented from both sector-specific (i.e. investment managers, investment service providers, issuers, benchmarks firms) and interconnected perspectives.

ESMA’s latest key findings conclude:

• NCAs struggle to establish infringements, “where the regulatory framework builds on unclear or ambiguous definitions”;
• “only a limited number” of greenwashing occurrences are currently detected;
• Most NCAs consider their sustainability-related capacities and expertise resources are “insufficient”;
• Almost all NCAs cite access to data (i.e. “relevant, high-quality and comparable”) as a key obstacle, with many now considering purchasing third-party data to assist their supervision.

ESMA also make many recommendations, listed in Annex 1 (p.61-64), which include:

a) ‘Remedial’ actions for market participants:

• Substantiate sustainability-related claims and communicate sustainability information in a manner that is fair, clear, and not misleading;
• Consider high-risk greenwashing areas in accordance with their sector;
• Upgrade firms’ governance, processes, skills, IT systems;
• Establish reliable, comprehensive sustainability data;
• Support comprehensibility for retail investors.

These were previously stated by ESMA in their interim June 2023 Greenwashing ‘progress report’.

b) ‘Pathway forward’ actions for EU authorities:

• ESMA to lead the way in developing greenwashing risk indicators and Supervisory Technology (‘SupTech’) solutions, plus additional guidance, to support monitoring efforts in the funds industry;
• NCAs should invest in external data access and use SupTech tools (e.g. natural language processing c/o machine learning) to assist analysis of fund portfolios and climate-related claims;
• The EC should “swiftly adopt” the draft SFDR L2 RTS to “improve access to machine-readable SFDR disclosures” for end-users and “foster the use of SupTech tools” by NCAs.

ESG disclosures are restated as one of ESMA’s ‘Union Strategic Supervisory Priorities’ (USSPs), to “foster supervisory convergence and support NCAs’ efforts”; this will “remain in place for the coming years”, with “all NCAs expected to carry out intensified supervisory work on this topic”.

NB: ESMA also acknowledge that tackling greenwashing requires “a global response, involving close cooperation among financial supervisors and the development of interoperable standards for sustainability disclosures”.

…which brings us to the next item:

C) UK-Sustainability Disclosure Requirements latest

 1. UK Anti-Greenwashing rule guidance now applies

On Friday 31 May, the local Anti‑Greenwashing Rule (AGR) began to legally apply in the UK.

As specified in the Financial Conduct Authority’s finalised guidance, the AGR now requires firms to ensure consistent reference to product sustainability characteristics, which should be “fair, clear and not misleading”.

The AGR applies to any financial product communication made by FCA-authorised firms to UK clients, if these refer to environmental and/or social characteristics. This includes asset managers using ESG‑related terms in their current fund names, who have until 2 Dec 2024 to align with the separate SDR ‘unlabelled’ product naming and marketing rules.

NB: although most of the SDR framework relates to retail investors, a reminder that all FCA-authorised firms are in scope of the AGR, regardless of whether they are subject to the UK Consumer Duty; promotions for overseas products (including EU-UCITS, within the temporary marketing permissions regime) are also in scope.

 2. FCA update websites ahead of fund labels milestone date

As the next key milestone nears, the FCA has revised their ‘Sustainability disclosure & labelling regime’ webpage.

Content now available to support firms impacted by the UK-SDR now includes:

• A reminder of the Anti-greenwashing rule now in force;
• Reference to the consultation on extending SDR regime to portfolio managers, which ends on 14 June;
• An updated website section, covering responses to “some common questions received so far”:
  • Investment labels: how to use and display SDR labels †
  • Criteria: including sustainability objectives, specific label features, key performance indicators, stewardship, asset classes and strategies (i.e. index-tracking, aligned, aligning financing);
  • Naming and marketing: scope and exceptions.

To support consumers, the FCA also updated their ‘Sustainable investment labels & anti-greenwashing’ webpage.

† NB: the FCA has now obtained trademarks on the SDR labels to be used from 31 July.

3. The IA share latest SDR industry guidance, trends

The Investment Association (IA) has recently shared additional SDR industry guidance and latest market trends.

a) ‘Cross-Trade Guidance on Consumer-Facing Disclosure [CFD] requirements’‡

This guidance was produced jointly by the IA, Eversheds Sutherland, ABI, AIC, PIMFA, TISA, UKSIF and the UK Depositary Association; it seeks to encourage more consistent CFDs between firms. It contains:

• ‘Best practice’ CFD frameworks for labelled and un-labelled products [per Appendix A];
• Guidance on Sustainability Approaches and Metrics;
• Other advice to “encourage more consistent disclosure between firms, improved comparability between products and better consumer understanding“.

 b) ‘SDR Implementation Guidance v1.0’

The IA and Eversheds Sutherland have also co-authored the first edition of their ‘Q&A’ document; this seeks to answer some (if not all) of the key questions raised by members so far, but will be kept under review as the SDR regime evolves over time.  There is also:

• Summary of key SDR milestones (p.6), distinguishing scope between retail and professional funds;
• Annex 1: Due diligence perspective – labelled Funds of Funds look-through to underlying funds;
• Annex 2: Relationship between consumer facing disclosure and other related disclosure requirements.

c) SDR Implementation Survey Results [May 2024]

This presents key findings from the IA’s latest member survey, which include:

• 14% of firms may be ‘early-adopters’: intending to apply for first SDR label(s) by 31 July 2024;
• 45% of firms: intend to apply for first SDR label(s) before end-Dec 2024;
• Up to 235 funds could be labelled:
  • the ‘Sustainability Focus’ label most popular [49%];
  • the ‘Sustainability Impact’ label least popular [12%].
• 70% of firms with UK domiciled funds will have non-labelled SDR products (requiring obligatory disclosures from 2 Dec 2024);
• 87% of firms have no plans to change any of their fund names (despite the AGR and pending SDR Naming & Marketing rules);
• The Top 10 implementation challenges cited by respondents (p.27).

UK asset managers planning to adopt an SDR label, or continue marketing unlabelled ESG products, can also refer to the previous ‘Guidance on Timing Considerations for SDR Implementation’, published in February. 

‡ NB: we understand there are no current plans to issue separate guidance for SDR Pre-Contractual Disclosures [PCDs].

4. GovUK remind firms of local ‘Green’ Taxonomy

On 16 May, the UK Government (GovUK) published their update of next steps to implement the SDR framework.

Alongside known SDR & investment label events, they outline additional activities linked to IFRS Sustainability Disclosure Standards, Transition Plan Taskforce [TPT] and Taskforce on Nature-related Financial Disclosures [TNFD].

GovUK also provide an update on the (almost forgotten) UK ‘Green’ Taxonomy [p.4-5].

They admit “developing a usable and useful taxonomy is a complex and technical exercise”; however, they “continue to work at pace”, and expect to “consult in due course.”

The latest ‘Timeline for SDR Implementation’ [p.7-8] indicates a ‘Launch of consultation on the design of the UK Green Taxonomy’ sometime during 2024. This will seek feedback on both:

• the overarching framework and use cases;
• the specific activity level criteria defining “green activities”.

After the Taxonomy has been finalised (based on initial consultation feedback), GovUK intend to:

• Introduce a testing period for voluntary disclosures;
• Use this for at least two reporting years before “exploring” mandating disclosures. 

NB: no other UK Taxonomy events are currently scheduled. GovUK stress they have “not yet made a decision on whether to introduce mandatory disclosures against the Taxonomy”.  This will be subject to further consultation, based on evidence obtained from the initial voluntary reporting phase; it is said this approach ensures any future obligatory Taxonomy reporting would provide “accessible, reliable information that is useful to markets”.

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Article written by Mark Kilbride