On 31 May 2022, the European Securities and Markets Authority (ESMA) published a supervisory briefing on sustainability risks and disclosures in investment management area (''Briefing''). The briefing is addressed to EU National Competent Authorities (NCAs). ESMA has developed this supervisory briefing to promote convergence on the supervision of sustainability-related disclosures as well as the supervision of how fund managers integrate sustainability risks in their organisational framework and decision-making processes. The content of this supervisory briefing is not subject to any “comply or explain” mechanism for NCAs regarding the supervision of sustainability-related disclosures and integration of sustainability risks.
We have summarised some of the topics covered in the Briefing in the sections outlined below.
Guidance for the supervision of fund documentation and marketing material
Verification of the compliance of the pre-contractual disclosures
The pre-contractual information for financial products disclosing under Articles 8(1) and 9(1)-(3) of the sustainable finance disclosure regulation (“SFDR”) are to be provided in an annex to the prospectus for UCITS, and in an annex to the information which is to be disclosed to investors in accordance with Article 23 of the alternative investment fund managers’ directive for alternative investment funds.
ESMA suggests to national authorities to create a checklist based on the disclosures to be made in the pre-contractual templates that will help assessing the compliance of the disclosures of new and existing funds disclosing under Article 8 or 9 SFDR and provides examples to be put on the checklist.
ESMA suggests to include on the checklist that the strategy to attain the objectives must be clearly identified and is part of the investment policy.
In addition, as suggested by ESMA, NCAs could reasonably expect that products disclosing under Article 9 SFDR would disclose Principal Adverse Impacts of investment decisions referred to in Article 7 SFDR, even though it is not mandatory, due to the requirements of DNSH disclosures for sustainable investments under SFDR delegated regulations.
Verification of the consistency of information in the fund documentation and marketing material
ESMA advises that NCAs should, on a risk-based approach, assess and be satisfied that the sustainability-related disclosures made are consistent across the fund documentation and the marketing material. The accuracy of the information provided in each document should first be reviewed. The content of the marketing material may be then reviewed for consistency with the sustainability related disclosures in the fund documentation.
ESMA confirms that fund names should not be misleading. The terms "green" or "sustainable" should only be used where there is evidence of sustainability characteristics.
In addition, ESMA advises that a sustainable investment policy and/or objectives should be included in the fund documentation. The fund's documentation must be based on the policy and the fund must be managed in accordance with it.
Verification of the compliance with the website disclosures' obligation
NCAs are advised by ESMA to verify that the information is published according to Article 24 of the SFDR Delegated Regulation for funds disclosing under Article 8 SFDR and Article 37 of the SFDR Delegated Regulation for funds disclosing under Article 9 SFDR.
Verification of the compliance with the periodic disclosures’ obligation
Article 11 SFDR refers to the periodic disclosure obligations and Articles 50 and 58 of the SFDR Delegated Regulation refer to the presentation and content requirements for periodic reports for financial products under Article 8(1) and 9(1)-(3) SFDR. This information is to be provided in an annex to the annual report (for UCITS and AIFS) in accordance with the templates set out in Annex IV and V of the SFDR Delegated Regulation. For this purpose, ESMA advises that NCAs could create a checklist based on the information to be provided in periodic reports that will help assessing the compliance of disclosures of funds disclosing under Article 8 or 9 SFDR (and Article 5 or 6 of TR).
Integration of sustainability risks by AIFMs and UCITS managers
The Commission Delegated Regulation (EU) 2021/1255 and Delegated Directive (EU) 2021/1270 set out that all authorised fund managers are required from 1 August 2022 to integrate sustainability risks in their portfolio and risk management processes and overall governance structure.
ESMA advices that NCAs should verify compliance of the UCITS management companies and AIFMs with these requirements by checking the description of the manner in which sustainability risks are integrated in their investment decisions in pre-contractual fund disclosures referred to in Article 6 SFDR and ensuring that UCITS management companies and AIFMs perform a review of the relevant internal policies and procedures on a periodic basis.
ESMA suggests that NCAs should verify the compliance of UCITS management companies and AIFMs with the disclosure of sustainability risk integration on websites referred to in Article 3 SFDR by performing sample checks based on surveys and questionnaires relating to the integration of sustainability risks.
Regulatory interventions in case of breaches
Article 14 SFDR prescribes that Member States shall ensure that the NCAs monitor the compliance of financial market participants and financial advisers with the requirements of SFDR. In this regard ESMA sets out examples of where administrative measures could be taken such as where the relevant disclosure was not made or where it was misleading, noting however that NCAs remain fully responsible for determining which course of actions should be taken to mitigate the supervisory risks and regulatory breaches in order to combat greenwashing and comply with the SFDR.