Marjorie: Irina, what does the current public consultation on SFDR mean in practice? And what could be the impact on the market players?
Irina: Marjorie, as you know, the SFDR started to apply as of 10 March 2021 and Level II RTS as of 1 January 2023. From the beginning, it was not an easy journey for market players to familiarise themselves with this new legal framework. The implementation of the whole set of required SFDR disclosures was quite challenging. The consultation on SFDR, which was open from 14 September 2023 to 22 December 2023, may be a lifejacket for market players that are still struggling with SFDR compliance.
Interestingly, the consultation highlighted two different options as part of the contemplated changes. Such options would offer on one hand, further development of the existing product categorisation, enhancing distinction between Articles 8 and 9 and the existing concepts embedded in them, while at the same time complementing them with additional (minimum) criteria defining more clearly products falling within the scope of each article. On the other hand, the second option would consist of a different product categorisation system focusing on different concepts, such as the type of investment strategy (i.e. promise of positive contribution to certain sustainability objectives, transition focus, etc.) that do not necessarily relate to those existing concepts. In practice, that would mean that the distinction between the current Articles 8 and 9 of SFDR may disappear altogether.
The impact on market players would actually depend on which option is to be adopted. However, the impact could be tremendous. Option 1 would potentially mean improving the existing framework, while option 2 would imply a compete reshaping of it. In the long run, option 2 might be easier to understand for investors and may turn out to be more efficient. As of now, adoption of the revised framework is planned for second quarter of 2024. So let’s monitor the topic closely!
Irina: So Marjorie, what are the latest updates on funds’ names using ESG and sustainability-related terms?
Marjorie: Irina, as you know, on 18 November 2022 ESMA launched a consultation on Guidelines on funds’ names using ESG or sustainability-related terms. ESMA was concerned that sustainability disclosures may increase the risk of “greenwashing” when funds are named as green or socially sustainable and when there are insufficient sustainability standards. The Guidelines address funds’ names by proposing quantitative thresholds criteria for the use of ESG and sustainability related terminology.
The consultation closed on 20 February 2023 and the ESMA received 125 responses, mainly from asset managers and their industry associations, NGOs and consumer representatives.
But what should be noted, is that on the 14th of December last year, the ESMA issued a public statement on this and explained that since the consultation was launched, the AIFMD and UCITS Directive reviews have progressed and the ESMA has decided to postpone the adoption of the Guidelines to ensure alignment with these reviews. Definitely something to keep eye out for in 2024!