Sustainability-related Disclosures For All Funds Proposed By EU Platform On Sustainable Finance – Fund Finance

On 17 December 2024, the EU Platform on Sustainable Finance (the
“Platform”), an advisory body to the European Commission
(the “Commission”), has published a briefing note to the Commission, outlining
their proposals for a new categorization system for sustainable
finance products (the “Proposal”). This is intended to be
in replacement of the current regime under the Sustainable Finance
Disclosure Regulation ((EU) 2019/2088, “SFDR”).

We outline below:

• Fund categories: the headline points of the
  proposed fund categories recommended by the Platform;




• Disclosures for all funds: the proposed
  metrics to be reported on by all funds (regardless of any
  commitment to sustainability); and




• Private markets: the key considerations made
  in relation to private markets’ funds.

Fund categories

In summary, the Platform recommends categorizing funds as
follows:

• Sustainable:
  

  • The sustainable category is applicable to funds that contribute
    to a sustainable investment objective through EU
    Taxonomy‑aligned investments or sustainable investments with
    no significant harmful activities (“DNSH”) for a minimum
    proportion of assets.

  
  

  • There is a significant elevation of the use of the EU Taxonomy
    ((EU) 2020/852) in this proposed category, in line with the
    European Supervisory Authorities’ Opinion which we reported on
    here. Essentially, the Platform recommends
    that if an economic activity is listed in the EU Taxonomy, then the
    requirements, including the technical screening criteria, of the EU
    Taxonomy must be met for it to be considered a sustainable
    investment. The more flexible definition of “sustainable
    investment” under Art. 2(17) of the SFDR can only be used if
    the economic activity is not listed in the EU Taxonomy. The
    Platform sets out “the more the EU Taxonomy is developed, the
    less need there will be for the use of the SFDR sustainable
    investments, ultimately leading to the full replacement by the EU
    Taxonomy”. Their rationale is that with multiple definitions
    of sustainable investment, it creates “confusion,
    inefficiencies, and ultimately undermines the overarching goal of
    the Sustainable Finance package”.

  
  

  • For the DNSH test, the principal adverse impacts
    (“PAIs”) must still be assessed, with an emphasis on the
    PAIs relevant to the sustainability features of the fund.

  
  

  • The Paris-aligned Benchmark exclusionary criteria must also be
    complied with for this category.

  
  

  • Further sustainability-related binding elements could be
    implemented, for example, on engagement.

  
  

  • For all binding elements of the sustainable investment strategy
    pursued, there must be corresponding sustainability indicators
    reported on, alongside reporting on EU-Taxonomy alignment and all
    mandatory PAIs.

  
  

  • There seems to be a drive to report on a more granular basis
    with regards to PAIs too, where managers will be required to
    “explain deficient or poor PAI indicator performance and how
    this is in line with the principle that the remainder should not
    undermine the sustainability objective”.
    




• Transition:
  

  • This category is intended where there are investments or
    portfolios supporting the transition to net zero and a sustainable
    economy, avoiding carbon lock‑ins, per the Commission’s
    recommendations on facilitating financing for the transition to a
    sustainable economy.

  
  

  • There are various options to commit to a transition, including
    by complying with decarbonisation according to the Benchmark
    Regulation ((EU) 2016/2011), tracking the Climate Transition
    Benchmarks or Paris-aligned Benchmarks, or committing to EU
    Taxonomy-aligned CapEx or transitional activities. Further options
    include committing to investments with transition plans or
    science-based targets, engaging with companies with an escalation
    (and ultimately divestment) plan to commit to a transition plan,
    and transitioning real estate and infrastructure investments with
    portfolio‑level commitments. The option(s) committed to must
    be made binding elements of the investment strategy.

  
  

  • The difference in the exclusion criteria compared to the
    sustainability category is that the criteria set out in the Climate
    Transition Benchmarks must be met.

  
  

  • Sustainability indicators must be reported on with regards to
    whichever option is committed to, alongside EU-Taxonomy alignment
    and reporting on all mandatory environmental PAIs if the focus is
    on environmental transition, or all mandatory social PAIs if the
    focus is social transition (or both).
    




• ESG collection:
  

  • Investments must be committed to one or more “material
    sustainability features” with flexibility of what this might
    be, including:
    

    • Effective reduction of the investment universe, e.g., by 20% in
      line with the French regulator’s, the AMF’s,
      expectations

    
    

    • Investing in funds that themselves are sustainable, transition
      or ESG collection

    
    

    • Investing in companies without transition plans with a credible
      engagement strategy, including an escalation (and ultimately
      divestment) plan to commit to a transition plan

    
    

    • Percentage of assets committed to year-on-year improvements or
      to be better than a reference benchmark

  
  

  • Other assets must not undermine the sustainability features
    committed to in the binding elements.

  
  

  • Adherence to minimum exclusions under the Climate Transition
    Benchmark criteria (although this is adjusted).




• As with the other proposed categories, the commitments must be
  binding on the investment strategy and have respective
  sustainability indicators.




• EU Taxonomy alignment must be reported on, and all mandatory
  environmental PAIs must be reported if the focus is on
  environmental characteristics, and all mandatory social PAIs must
  be reported if the focus is on social characteristics (or both).
  Notwithstanding this, there are certain core PAI indicators that
  must be reported on, as set out below under ‘Minimum disclosure
  for all funds’.

All other funds should be identified as unclassified
products, the Platform recommends — nevertheless
with a set of mandatory sustainability disclosures, as set out
below. Further, a disclaimer should state that (i) the fund is
unclassified; (ii) it does not fulfil the standards required for a
categorised financial product; and (iii) any ESG characteristics or
sustainable or transition features must only be described in the
legal documentation.

There is no separate impact investing category, however, the
Platform sees merit in the European Commission analysing how impact
investing funds could be considered in the categorisation. This is
in contrast to the UK’s labelling regime under the
Sustainability Disclosure Requirements, which does have a specific
impact label.

Minimum disclosures for all funds

In a marked departure from the light-touch current Article 6
fund disclosure requirements, the Platform proposes that all funds
are required to report on:

• EU Taxonomy alignment (revenue and CapEx); and




• PAIs on GHG emissions, carbon footprint, GHG intensity of
  investee companies and UN Guiding Principles or OECD Multinational
  Enterprises Guidelines.

There seem limited options in the Proposal for not providing
such disclosures, with the Platform instead noting that estimates
could be used.

Private markets

There is an acknowledgement at the front of the Proposal that it
“puts retail investors and their needs at its core”.
There are also scattered references to private markets, however,
including:

• PAIs: the Platform notes that PAIs are often
  not tailored for private market investments like infrastructure
  debt and equity, private equity and debt, venture capital, real
  assets and indirect investments. The Platform sets out it would
  welcome guidance from the Commission on how these investments can
  be assessed via the PAIs, for example, by providing examples of
  indicators that can be used as a proxy for indicators commonly used
  for listed asset classes. Similarly, the Platform recommends
  further analysis on setting thresholds for PAIs in private market
  funds.




• Sustainability indicators: as set out in the
  summary of the proposed categories, there are many suggested
  indicators; however, the Platform acknowledges that particularly
  for non‑listed assets such as real estate and private market
  investments there could be a need for the use of tailored
  indicators.




• Ramp up/wind down: whilst there is the concept
  of mandatory commitments which need to be maintained throughout a
  fund’s lifecycle, there is the awareness from the Platform that
  the mandatory commitment could be applicable in a timeframe
  specified with reference to private market funds’ ramp up and
  wind-down phases.

Application to Overseas Funds marketed in the EEA by non-EEA
Managers

We note there is no direct coverage of the applicability of the
Proposals to overseas funds marketed into the EEA and therefore
presume that a marketing notification in one or more EEA Member
States under a national private placement regime will bring funds
managed by non-EEA managers into the scope.

Next steps

There is no committed timeline for the European Commission to
consider the Platform’s Proposal or for SFDR 2.0 to be
implemented. However, the influential Platform’s Proposal will
certainly trigger momentum on developments.

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