What is an Article 6 product under SFDR?
Article 6: funds that do not consider sustainability risks.
What is an Article 8 product under SFDR?
Article 8: funds that consider sustainability risks, and promote ESG characteristics.
What is an Article 9 product under SFDR?
Article 9: funds that have sustainable investment as their main objective.
Why should I care if my fund is Article 6, 8 or 9?
The essential reason for these new laws is to protect investors from being sold a fund that claims to be good for the environment and society, but is in reality just a pre-existing investment strategy with a new label and new marketing materials. A majority of funds want to be classified as Article 8, largely because they are concerned that many investment consultants, asset owners and fund platforms will no longer consider funds that are not at least ‘Article 8’.
What do I need to do if I want my fund to be Article 8?
Disclosure is the key to compliance with SFDR – it isn’t called a ‘Disclosure Requirement’ for nothing. You need to disclose whether certain specific ESG-sensitive policies are applied to the way you run the fund. You also need to assess the extent to which the fund’s investments might be undermining European environmental and social objectives. This involves assessing, each quarter, every one of your holdings against 14 PAIs (‘Principal Adverse Indicators’, each of which is specifically defined in the regulation).
If I have invested in companies that are undermining European environmental and social objectives, does this disqualify the fund from being Article 8?
No, if you can argue that these investments don’t contradict your overall claim that as the fund manager, you ‘promote environmental and social characteristics’ and that you ‘take actions to address’ these ‘adverse impacts’.
Some funds classify themselves as Article 8, even though they haven’t done these PAI assessments. How can that be?
Article 4 of the legislation allows fund managers with <500 staff not to consider these PAIs, providing they explain clearly why not. These funds will face a problem if they want to be Article 8 however, rather than just Article 6. This is because the regulation states that Article 8 funds must disclose to all potential investors ‘how are the key indicators in the PAI Statement taken into account’ before any ‘sustainable investment’ is made. We do not think a fund can rely on Article 4 if it also wants to be Article 8. There is a further pressure, which comes from August 2021 amendments to MiFID II, rather than from SFDR. Private wealth managers must now give investors the option to request the inclusion of investments that ‘consider principal adverse indicators on sustainability factors’. This means such managers will demand that any fund they might offer to their clients, has completed PAI assessments.
Do public companies generally disclose all the data a fund needs to complete these PAI assessments?
No. But the legislation makes clear that a fund needs to make ‘best efforts’ and where such data is not available, it can make ‘reasonable assumptions.’
Do I need to assess my fund against an ESG benchmark?
No - this is optional, despite benchmark providers suggesting this will become ‘standard practice’.
Where do I need to disclose this information?
On your website, in marketing materials for the fund, and in ‘pre-contractual information’ (the documents you give investors before they commit).
What happens if I declare my fund as ‘Article 8’ without meeting all the requirements?
Nothing until 2023. Thereafter, you could get penalised by the EU regulator, and later by the UK regulator. Your fund might get excluded from certain platforms, who are starting to ignore how funds have labelled themselves, and are now making their own Article 8/Sustainability assessments. Perhaps most concerning, several law firms are warning fund managers of the risk of facing investor class actions, on the grounds of ‘mis-selling’ a fund to investors.