SFDR: COMPLIANCE PLANNING FOR 1 JANUARY 2022 - A guide to the EU Sustainable Finance Disclosures Regulation for Funds and Fund Management ...
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// A S S E T M A N A G E M E N T & I N V E S T M E N T F U N D S SFDR: COMPLIANCE PLANNING FOR 1 JANUARY 2022 A guide to the EU Sustainable Finance Disclosures Regulation for Funds and Fund Management Companies June 2021
// A S S E T M A N A G E M E N T & I N V E S T M E N T F U N D S SFDR: Compliance Planning for 1 January 2022
Part A
OVERVIEW OF Section 1:
Three Categories of SFDR Requirements 05
SFDR RULES
Section 2:
Level 2 For Two of Three Categories 06
Section 3:
How Can William Fry Help? 07
Section 4:
Timing to Impact 08
Section 5:
Which Managers are in scope and how? 10
Part B
SFDR LEVEL 2 Section 1:
Sustainability Impact Disclosures 13
RULES IN DETAIL
Section 2:
Sustainable Fund Disclosures 22
Section 3:
Data Sources 36
Section 4:
Mandatory and Optional KPI 38
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// A S S E T M A N A G E M E N T & I N V E S T M E N T F U N D S SFDR: Compliance Planning for 1 January 2022
SECTION 1:
T H R E E CAT EG O R I ES
O F S F D R R EQ U I R E M E N TS
On 10 March 2021, the Sustainable Finance Disclosures Regulation (SFDR Level 1)
imposed a raft of new sustainability assessment and disclosure obligations on UCITS
managers and AIFMs (including internally managed UCITS and AIFs) (Managers).
These obligations fall into one of three core categories:
Overview of
Sustainability Risk SFDR Level 1 requires Managers to assess the potential for
environmental, social and governance (ESG) factors to negatively
impact the returns of funds under management and disclose
the outcome of that assessment to investors both in the funds’
SFDR Rules
prospectus documents and on the Manager’s website.
Sustainability Impact SFDR Level 1 requires Managers, on a comply-or-explain basis, to
assess and make website disclosure of the negative or adverse
impacts of funds’ investments on ESG factors.
Sustainable Fund Funds marketed as having an environmental or social element to
their investment strategy (Light Green Funds) or which specifically
(Light/Dark Green Funds)
target environmental or social investments (Dark Green Funds) are
subject to enhanced prospectus, periodic and website disclosure
requirements under SFDR Level 1.
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// A S S E T M A N A G E M E N T & I N V E S T M E N T F U N D S SFDR: Compliance Planning for 1 January 2022
SECTION 2: SECTION 3:
L E V E L 2 FO R H OW CA N
T WO O F T H R E E CAT EG O R I ES W I L L I A M F RY H E L P ?
SUSTAINABILITY IMPACT & SUSTAINABLE FUNDS SUSTAINABILITY RISK In July 2020, William Fry’s Asset Management & Investment Funds team published a detailed
Compliance Action Plan for use by Managers in planning for and demonstrating compliance ahead
In addition to the SFDR Level 1 principles- There are no Level 2 Rules for Sustainability of the first SFDR Level 1 deadline of 10 March 2021 (the July 2020 Compliance Action Plan).
based rules (Section 1. above), Managers Risk, however, additional Sustainability Risk-
will shortly be subject to detailed technical related requirements, in the form of UCITS With the second key compliance deadline of 1 January 2022 rapidly approaching, we have
standards which prescriptively mandate the and AIFMD regime amendments, were undertaken a deep-dive analysis of the Level 2 Rules to again support Managers’ preparations
form of compliance with the SFDR Level 1 adopted by the Commission on 21 April 2021 for compliance with their forthcoming disclosure obligations. This guide builds on our July 2020
Sustainability Impact and Sustainable Fund and are scheduled to apply from October Compliance Action Plan and incorporates relevant developments since that date including:
rules (Level 2 Rules). The Level 2 Rules are 2022, following their transposition into Irish
scheduled to come into effect from 1 January law. The UCITS and AIFMD amendments › February 2021: ESA adoption of Level 2 Rules;
2022. will require Managers to adapt their existing
› March – May 2021: ESA consultation on Taxonomy-related Level 2 Rules;
due diligence and governance arrangements
The Level 2 Rules for Sustainability Impact for the assessment and consideration of › April 2021: ESA public hearing on Taxonomy-related Level 2 Rules; and
and a significant portion of those for Sustainability Risk. › April 2021: Commission publication of latest package of Sustainable Finance measures.
Sustainable Funds were adopted by the
European Supervisory Authorities (ESAs) in As the Level 2 Rules have not yet been finalised, this analysis could be impacted by any pre-
February 2021 and are shortly expected to be finalisation amendments to the Level 2 Rules. However, it’s generally anticipated that the version
finalised by the Commission and published of the Level 2 Rules currently available is unlikely to materially change during the stages of the
with an effective date of 1 January 2022. The legislative process yet to completed.
remaining Sustainable Fund Level 2 Rules
(relating to Taxonomy compliance) were
under consultation until 12 May 2021 and,
despite remaining subject to adoption by the
ESAs, are also slated to come into effect on
1 January 2022. For ease, any reference in
this briefing to the Level 2 Rules includes both
the February (ESA-adopted) standards and
the later, as yet to be adopted by the ESAs,
Taxonomy-related standards.
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SECTION 4: Jan – Dec 2023:
sustainability impact rules first in
T I M I N G TO I M PACT effect for large Managers under
proposed Corporate Sustainability
Reporting Directive
The following highlights the key compliance deadlines and action items for Managers under SFDR
Level 1 and Level 2 Rules:
SFDR Level 1 Sustainability Impact • Level 2 Rules First PAI Statement UCITS & AIFMD Prospectus Taxonomy-related First full (qualitative
(other than periodic (SFDR Level 1) (including Taxonomy- (qualitative only - Sustainability disclosure of Sustainable Fund and quantitative)
disclosure rules) rules mandatory for related disclosure i.e. no reporting Risk-related rules Sustainability rules effective for PAI statement due
rules for first two, for publication on
effective larger Managers against KPIs) due expected to be in Impact required all (i.e. the further
climate- related,
for publication on force four) Taxonomy website
environmental
objectives) effective website environmental
• SFDR Level 1 periodic objectives
disclosure and
Taxonomy-related
rules effective
10 March 30 June 1 January 30 June October 30 December 1 January 30 June
2021 2021 2022 2022 2022 2022 2023 2023
Jan – Dec 2022:
first reference period for quantitative assessment of Sustainability Impacts
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SECTION 5: The decision tree below facilitates Managers’ assessment of the scope of the Level 2 Rules and how
they may be impacted. This is based on key considerations such as proportionality, the investment
W H I C H M A N AG E R S A R E
objective and strategies (green/non-green) of funds under management and target investors’
demand for sustainable investment opportunities.
I N S C O P E A N D H OW ?
From 1 January 2022, Managers with >500 employees must assess the adverse Sustainability Impacts of
investments using at least the mandatory and optional indicators in the Level 2 Rules and disclose on the
Do you have less than 500 employees? No
website the outcome of that assessment by 30 June 2023 using the mandated disclosure template. The
requirement to make Fund-level disclosure of adverse Sustainability Impacts applies from 30 December 2022.
Yes
From 1 January 2022, Managers who opt in must assess the adverse Sustainability Impacts of investments
from the opt-in date using at least the mandatory and optional indicators in the Level 2 Rules and disclose on
Did you/do you intend to opt-in to the Sustainability Impact rules? Yes
their website the outcome of that assessment using the mandated disclosure template. The requirement to
make Fund-level disclosure of adverse Sustainability Impacts applies from 30 December 2022.
No
Level 2 Rules are unlikely to impact Managers who opt out of Sustainability Impact rules and are not in
Have you classified funds under management as in scope of Articles 8 and/or 9 SFDR? No
scope of the Sustainable Fund rules.
Yes
Do the Article 8 and/or 9 funds have an environmental (as distinct from social) strategy or objectives? No
These Article 8/9 funds are subject to the Level 2 Rules for Sustainable Funds other than those relating to
the assessment and disclosure of compliance with the Taxonomy. Non-compliance with the Taxonomy
Yes must be disclosed using the mandatory disclosure templates.
No
Do the Article 8* funds invest in Sustainable Investments i.e. investments which contribute to an
environmental objective while not significantly harming other environmental objectives?
*Note, Article 9 funds, by definition, invest in Sustainable Investments. Article 8 funds with an environmental strategy that invest in Sustainable Investments and Article 9 funds
Yes with environmental objectives are subject to Level 2 Rules for Sustainable Funds including those relating
to the assessment and disclosure of compliance with the Taxonomy.
A key compliance challenge for Managers in scope of the Level 2 Rules will be in accessing adequate,
reliable, accurate, and affordable data. The proposed Corporate Sustainability Reporting Directive, Level
2 measures for the Taxonomy Regulation and other EU legislative initiatives are, once finalised and in
effect, intended to improve the quality and availability of sustainability data. The Level 2 Rules set down
a priority waterfall for the use and sourcing of sustainability data which prioritises data sourced directly
from investee companies, followed by internal market research, third party data providers or external
experts and finally by making reasonable assumptions. See Part C below for further details.
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SECTION 1:
S U STA I N A B I L I T Y
I M PACT D I S C LO S U R ES
With effect from 10 March 2021, Managers are required to assess and publish
qualitative website disclosure of the negative or adverse impacts of funds’
investments on the environment, social and employee matters, respect for human
rights, anti-corruption and anti-bribery matters (Sustainability Impacts). This SFDR
Level 1 requirement applies on a comply-or-explain basis for Managers with 500
employees or less. Managers with more than 500 employees can opt to explain
non-compliance until 30 June 2021 but must comply thereafter, i.e. such Managers
lose the ability to explain non-compliance from that date. From 1 January 2022,
the Level 2 Rules (which likewise apply on a comply-or-explain basis for Managers
with ≤ 500 employees) mandate the form of assessment of adverse Sustainability
SFDR LEVEL 2
Impacts and require enhanced qualitative, along with quantitative, disclosures of
the outcome of that assessment by 30 June each year.
RULES IN DETAIL
Sustainability Impact The Level 2 Rules mandate the use of a prescriptive template for
disclosing Sustainability Impacts. The template, referred to as a
Disclosure Template
principal adverse Sustainability Impacts statement (PAI Statement),
contains five sections.
The enhanced qualitative disclosure requirements under Level 2
Rules are set out in Sections 1, 3, 4 and 5 and quantitative disclosures
are contained in Section 2 of the template PAI Statement:
Template Level 2 PAI Statement
QUALITATIVE/QUANTITATIVE
SECTION DISCLOSURE REQUIREMENT
Section 1: Summary Qualitative
Section 2: Description of Principal Adverse Sustainability Impacts Quantitative
Section 3: Policies and Procedures Qualitative
Section 4: Engagement Policies Qualitative
Section 5: International Standards Qualitative
A detailed summary of the disclosures required under the template PAI Statement is set out at
pages 18 and 19 below.
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Enhanced Qualitative Disclosures from 30 June 202 2 New Quantitative Disclosures from 30 June 2023
The Level 2 Rules expand on the qualitative assessment and disclosure of adverse Sustainability
Impacts required under SFDR Level 1. A detailed summary of the enhanced qualitative disclosures ASSESSMENT The Level 2 Rules mandate performance of the quantitative
is set out at pages 18 and 19 below. assessment of Sustainability Impacts by reference to a full calendar
PERIODS
year (each a Reference Period) or part thereof, in the case of
Managers that have opted to comply by 1 January 2022 must address the enhanced qualitative Managers that opt to comply in the course of a Reference Period.
disclosures in the first PAI Statement, due for publication under the Level 2 Rules by 30 June 2022.
The first Reference Period under the Level 2 Rules will run from 1
However, any Manager that opts to comply after the Level 2 Rules come into effect on 1 January January – 31 December 2022. This will be the first Reference Period
2022, is subject to the enhanced qualitative disclosure requirements from their relevant opt-in for Managers that have opted to comply with Sustainability Impact
date. As a result, Managers considering opting into Sustainability Impact rules should note that rules before or during this period.
delaying such a decision beyond 1 January 2022 could result in an earlier (i.e. opt-in date versus 30
June 2022) disclosure obligation than if the decision was made pre-1 January 2022. In any given Reference Period, the quantitative assessment of
Sustainability Impacts should be carried out on at least four
calculation dates of 31 March, 30 June 30 September, and 31
December. The specification of calculation dates is a welcome
change from the consultation draft of the Level 2 Rules which
potentially required a continuous and ongoing assessment of
adverse Sustainability Impacts throughout a Reference Period.
W E B S I T E D I S C LO S U R E S R U L E S : DISCLOSURE DATES By 30 June of the year following the relevant Reference Period,
Managers must quantitatively disclose, using the template
& INDICATORS
PAI Statement, the Sustainability Impact of underlying funds’
• be easily accessible, non-discriminatory, free of charge, investments. As the first Reference Period under the Level 2 Rules
prominent, simple, concise, comprehensible, fair, clear runs from 1 January – 31 December 2022, the first quantitative PAI
and not misleading; Statement is due by 30 June 2023.
• use the disclosure template but, subject to the above, may At a minimum, the quantitative assessment and disclosure
use different font types, size and colours; of Sustainability Impacts must include a mandatory set of 18
environmental and social impact indicators (KPIs) and at least one
• be published in a searchable electronic format; KPI from each list of optional environmental and social KPIs. The
form of disclosure for mandatory and optional KPIs is prescribed
• kept up to date, include the date of publication and clearly in the template PAI Statement which mandates disclosure of the
identify any updated text with the date of the update; indicator metric, identified impact, historical impacts (if available),
explanatory details and actions taken to mitigate impact.
• if using a downloadable file, the version history must be
included in the file name; and Both mandatory and optional KPIs are further divided into
those applicable to (i) investee companies, (ii) sovereigns and
• LEIs and ISINs should be included when referencing entities supranationals, and (iii) real estate investments. A welcome
or products within disclosures. clarification of the consultation draft that acknowledges the KPIs
applicability to a more tailored list of investments.
The full list of mandatory and optional KPIs are set out in Part C,
Section 4 of this document.
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Tra n s i ti o n a l a r ra n g e m e nt s A d d i ti o n a l S u s t a i n a b i l i t y
u n d e r Leve l 2 Ru l e s Impact rules
Managers opting to As the first PAI statement is due for publication during the first Corporate As part of its April 2021 Sustainable Finance package of
Reference Period (1 January to 31 December 2022), Managers measures, the EU proposed a Corporate Sustainability Reporting
comply pre-1 January Sustainability
may publish a qualitative-only PAI Statement on or before the Directive (CSRD). The CSRD is intended to enhance the existing
2022 first publication deadline of 30 June 2022. Therefore, Managers Reporting Directive Non-Financial Reporting Directive (NFRD) which mandates
need only disclose Sections 1, 3,4 and 5 of the template PAI sustainability reporting by banks, insurers and large listed
Statement on their websites by 30 June 2022. companies, with >500 employees. The CSRD, which is expected
to become applicable for company reports published in 2024
The first full PAI Statement (Sections 1-5 inclusive), incorporating (covering financial year 2023), provides for more detailed
both quantitative and qualitative disclosures, is due by 30 June sustainability reporting and by a larger category of companies
2023 and should address Sustainability Impacts identified than is in scope of the NFRD.
during the first Reference Period of 1 January – 31 December
2022. Managers and corporate investment funds which qualify as large
companies under the proposed CSRD would be required to
comply with its sustainability reporting rules from January 2024.
Large companies under NFRD/CSRD are those which exceed
two out of three criteria of balance sheet total >€20,000,000;
net turnover: €40,000,000, avg. employees: 250. From January
2026, small and medium EU listed Managers (other than micro-
companies) and corporate investment funds, are proposed to
be in scope of the proportionate CSRD rules for listed SMEs.
Managers opting to Managers opting to comply with the Sustainability Impact rules Article 8 Taxonomy From 1 January 2022, Article 8 of the Taxonomy requires companies
during the first and any subsequent Reference Periods must in scope of the NFRD to report how and to what extent they use
comply post-1 January Regulation
publish a qualitative-only PAI Statement on their relevant opt- the Taxonomy when investing in environmentally sustainable
2022 in date. A full PAI statement, incorporating the quantitative activities (Article 8 Disclosures). Following the replacement of
assessment of KPIs from opt-in date to 31 December of the the NFRD with the CSRD, the scope of companies subject to
relevant year (first Reference Period), must be published by 30 Article 8 Disclosures will automatically be extended to include
June of the following year. those in scope of the CSRD, including Managers which meet the
NFRD criteria for large companies (i.e. exceed two out of three
of the balance sheet, net turnover and employee criteria above).
As a result, in-scope Managers would be obliged to report,
from January 2024, their Green Investment Ratio being the
proportion of AUM (from both collective and individual portfolio
management activities) in taxonomy-aligned investments.
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WEBSITE ‘Policies and Procedures’ must include a description of the policies and
procedures governing the identification and management of adverse
Section 3:
D I S C LO S U R ES
Sustainability Impacts and how these are maintained and applied including:
• date of approval;
By 30 June each year, opt-in Managers must publish a website PAI statement with
• allocation of responsibilities for implementation;
results from the assessment of the main or principal adverse Sustainability Impacts
• methodologies used to select principal adverse impact KPIs, how they take
of investments during the previous reference period.
into account the probability of occurrence, severity of impact, potential to
be irredeemable;
• any margin of error within those methodologies; and
Section 1: must include summary details of:
• the data sources which adhere to the following order of priority:
• the name of the Manager;
› directly from investee companies,
• confirmation of assessment of its investment decisions’ adverse
› by carrying out additional research,
Sustainability Impacts; and
› cooperating with third party data providers or external experts, or
• a summary of the PAI Statement (max two A4 pages) in both its home
Member State language and, if marketing on a cross-border basis, in one › making reasonable assumptions.
of the official languages of the host Member State(s).
Section 2: ‘Description of Principal Adverse Sustainability Impacts’ must include: ‘Engagement Policies’ must include, where applicable, brief summaries of
Shareholders’ Rights Directive II engagement policies and/or other engagement
• the adverse Sustainability Impacts identified during the relevant reference policies adopted to mitigate the adverse Sustainability Impacts of investment
period, presented as an average of the impacts identified on at least four Section 4: decisions.
prescribed calculation dates (31 March, 30 June 30 September and 31
December) using:
› the 18 mandatory KPIs annexed to the Level 2 Rules;
› at least one of the additional climate or other environmental KPIs in the
‘International Standards’ must include the Manager’s adherence to
list of those annexed to the Level 2 Rules;
responsible business conduct codes and internationally recognised
› at least one of the additional social, employee, human rights, anti- standards for due diligence and reporting and, where relevant, the degree of
corruption or anti-bribery KPI in the list of those annexed to the Level 2 Section 5: their alignment with the Paris Agreement objectives and specifically disclose:
Rules; and
• the adverse impact KPIs referred to within Section 2 above that were used
› any other KPIs used to identify and assess the main adverse Sustainability to measure that adherence/alignment;
Impacts of the Manager’s investment decisions;
• the methodology and data used to measure that adherence/alignment
• a description of any mitigating actions taken or planned to address the including scope of coverage, data sources and how the methodology
adverse Sustainability Impacts disclosed; forecasts future performance of investee companies;
• information on internal policies for the identification and management of • if a forward-looking climate scenario is used, detail that scenario including
adverse Sustainability Impacts; and the name and provider and when it was designed; and
• if this is not the first PAI Statement to be published by the Manager, a • if no forward-looking climate scenario is used, an explanation of why the
historical comparison with previous reference periods (at least 5 or as Manager does not consider such scenarios relevant.
many as available).
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Key D ate s
Managers who opt-in to Sustainability Impact requirements pre-1 January 2022: Managers who opt in to Sustainability Impact requirements post-1 January 2022:
First reference period for conducting 1 January 2022 – 31 December 2022 First reference period for conducting Opt-in date to 31 December of that year
quantitative assessment of PAI against KPIs quantitative assessment of PAI against KPIs
First quantitative PAI assessment calculation 31 March, 30 June 30 September and 31 First quantitative PAI assessment calculation 31 March, 30 June 30 September and 31
dates December 2022 dates December of opt-in year (or as many as is
remaining post opt-in date)
Thereafter 31 March, 30 June 30 September,
and 31 December each year. Thereafter 31 March, 30 June 30 September,
and 31 December each year
First qualitative only PAI Statement Due by 30 June 2022
First (qualitative only) PAI Statement Due by opt-in date
First full (qualitative and quantitative) PAI Due by 30 June 2023
Statement to be published on Manager First (qualitative and quantitative) PAI Due by 30 June of the year following opt-in
website Thereafter 30 June each year Statement date
Thereafter 30 June each year
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S E C T I O N 2 : S U STA I N A B L E
F U N D D I S C LO S U R ES
SFDR sets down enhanced disclosure requirements
for Light Green and Dark Green Funds.
Light Green Funds are those in scope of Article 8 SFDR disclosure
rules as a result of marketing an environmental or social element
of the funds’ investment strategy.
Dark Green Funds are those in scope of Article 9 SFDR disclosure
rules as a result of having an environmental or social objective.
From 1 January 2022, funds classified as Light Green or Dark
Green under SFDR will be subject to additional, more detailed
prospectus, periodic and website disclosures under the Level
2 Rules. The prospectus and periodic disclosures must be
made using the templates appended to the Level 2 Rules. The
analysis table at pages 28-35 below details these disclosure
requirements.
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S u s t a i n a b l e I nve s tm e nt s Ta xo n o my- a l i g n e d S u s t a i n a b l e I nve s t m e nt s
A key differentiator between Light The environmental or social element of the Additionally, if a Light or Dark Green Fund’s Sustainable Investments are intended to contribute to an
Green and Dark Green Funds is the strategy promoted by a Light Green Fund may environmental (as distinct from a social) objective (Environmentally Sustainable Investments), the
take several forms but the application of a Manager must disclose whether or not they use the Taxonomy, being the EU classification system
level of investment in SFDR-defined
positive or negative ESG screen to the fund’s for environmentally sustainable activities, in the allocation of fund assets. Managers that use the
sustainable investments. Essentially,
portfolio of investments is generally the most Taxonomy must assess and disclose the proportion of Environmentally Sustainable Investments in
these are investments, the underlying common approach. The application of an ESG activities that qualify as environmentally sustainable activities under the Taxonomy as a percentage
activity of which, contributes to either screen, or indeed the implementation of other of AUM. This sub-set of Environmentally Sustainable Investments in Taxonomy-compliant activities
an environmental or social objective types of environmental or social investment are referred to as Taxonomy-aligned Sustainable Investments. Managers that do not use the
while simultaneously not doing approaches, may (or may not) result in a Light Taxonomy to allocate assets must disclose non-Taxonomy alignment of the fund portfolio. Both
significant harm to other environmental Green Fund deciding to hold Sustainable negative and positive disclosures in respect of a Manager’s use of the Taxonomy for Light and/or
Investments. This flexibility is recognised Dark Green Funds is required by 1 January 2022 under SFDR Level 1 Rules.
or social objectives (Sustainable
under SFDR, which notes that Light Green
Investments).
Funds may hold Sustainable Investments but
whether they do is not determinative of the
While no minimum holding of Sustainable
scope of Article 8 SFDR. If, however, a Light
Investments is prescribed under SFDR
Green Fund chooses to invest in Sustainable
(consistent with its disclosure-focus), the
Investments, the Level 2 Rules prescribe
ESAs expect Dark Green Funds to invest
detailed prospectus, website and periodic
substantially in Sustainable Investments
disclosures in respect of such investments.
and the Level 2 Rules prescribe detailed
prospectus, website and periodic disclosures
in respect of a Dark Green Fund’s planned and
actual holdings in Sustainable Investments.
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C a l c u l ati n g Non-Light and Dark Green
Ta xo n o my- a l i g n m e nt Fund Prospectus Disclosures
The Level 2 Rules set down the methodology to be used for calculating the Taxonomy-alignment of From 1 January 2022, for any fund not in scope of Article 8 Light Green or Article 9 Dark Green
a Dark Green or Light Green Fund’s portfolio based on: disclosure rules, the following must be disclosed in its prospectus and annual report:
• market value of all Taxonomy-aligned fund investments “The investments underlying this financial product do not take into account the EU criteria for
environmentally sustainable activities”.
• market value of all fund investments
The numerator is the weighted average Taxonomy-aligned activity contribution calculated as
follows:
• debt and equity holdings in NFRD 1 financial companies: value of Taxonomy-aligned activities
disclosed by underlying company under the Taxonomy e.g. if an underlying company which
is subject to the NFRD reports 10% of activities as Taxonomy-aligned and the value of the
investment is EUR50m then the Taxonomy-alignment of the investment is EUR5m;
• debt and equity holdings in NFRD non-financial companies: value of investment weighted
by share of turnover (or CapEx or OpEx) contributing to Taxonomy-aligned environmentally
sustainable activities e.g. if underlying company reports 10% of turnover as contributing to
Taxonomy-aligned activities and the investment is valued at EUR50m then the Taxonomy-
alignment of the investment is EUR5m;
• debt and equity holdings in non-NFRD companies: based on calculation methodology for NFRD
companies but use investee companies’ NFRD equivalent disclosures. The ESAs note that
calculating the level of Taxonomy-aligned activities of non-EEA companies will require “further
research and the development of appropriate methodologies”;
• green bonds issued under EU Green Bond Standard: 100% of value;
• other green bonds: proportion of bond value that corresponds to the share of the bond proceeds
used for Taxonomy-aligned environmentally sustainable activities e.g. fund holds EUR20m in
green bonds whose issuers indicate that 50% of the use of proceeds go to Taxonomy-aligned
activities then the Taxonomy-alignment of the investment is EUR10m;
• real estate: the market value of Taxonomy-aligned real estate investments;
• sovereign debt: given the current data challenges, sovereign bonds cannot be included as
Taxonomy-aligned.
1
Directive 2014/95/EU or the Non-Financial Reporting Directive (NFRD) lays down the rules on non-financial disclosures by large and listed companies.
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Light Green Fund
Disclosure Requirements
asset allocation
› the planned asset allocation split between (i) investments aligned with E/S strategy and (ii)
all other investments;
L I G H T G R E E N F U N D P R O S P EC T U S D I S C LO S U R E S › the planned asset allocation split of (i) between (a) Sustainable Investments and (b) other
investments aligned with E/S strategy;
› if (a) includes Environmentally Sustainable Investments, a graphical representation of the
Mandatory disclosure template2 to be used to disclose key E/S strategy and planned asset allocation information planned asset allocation (percentage) to Taxonomy-aligned Sustainable Investments;
› if disclose planned asset allocation to Taxonomy-aligned Sustainable Investments, include:
• a statement that the underlying activities of such investments are Taxonomy-aligned
In the main body of the prospectus disclose that:
activities and if this is subject to external third-party review, the name of the relevant
› information on the environmental and social characteristics of a fund are available in the auditor or third party;
annex (see below); and
• whether Taxonomy-alignment of non-financial investee companies is measured by
› if E strategy adopted, “The ‘do no significant harm’ principle applies only to those turnover or Capex or Opex and reason for choice;
investments underlying the financial product that take into account the EU criteria for
• data sources if not using public disclosures from investee companies; and
environmentally sustainable economic activities.” and “The investments underlying the
remaining proportion of this financial product do not take into account the EU criteria for • the minimum share of transitional and enabling activities;
environmentally sustainable economic activities” › if (a) above includes non-Taxonomy aligned Sustainable Investments, include:
• minimum share of non-Taxonomy-aligned Sustainable Investments and reasons for
In an annex to the prospectus, disclose:
such investments; and
prominent statements
• how such investments comply with SFDR ‘do not significantly harm’ principle using
› that the fund does not have a sustainable investment objective (to differentiate it from
the adverse impact KPIs appended to Level 2 Rules and their alignment with the OECD
Dark Green funds);
Guidelines for Multinational Enterprises and UN Guiding Principles on Business and
› whether the fund plans to allocate assets to Sustainable Investments and, if so, whether Human Rights;
these will be Taxonomy-aligned Sustainable Investments;
› the purpose of ‘other’ investments ((b) above) and whether they are subject to any minimum
environmental or social safeguards;
investment strategy
› the binding environmental or social elements of the fund’s investment strategy (E/S strategy) adverse sustainability impacts
and the sustainability KPIs used to measure success in implementing that strategy;
› does the Fund assess the adverse Sustainability Impacts of investments;
› if planned asset allocation (see below for details) to environmentally Sustainable Investments,
confirm the Taxonomy environmental objectives which form part of the E strategy;
reference benchmark (if applicable)
› if applicable, any commitment to reduce the scope of investments by a minimum rate as
› any benchmark used to implement the E/S strategy, how this index differs from a relevant
part of the E/S strategy;
broad market index and how the index is continuously aligned with the E/S strategy of the
› the policy for the assessment of investee companies’ good governance practices including Fund; and
with respect to sound management structures, employee relations, remuneration of staff
and tax compliance; further information
› if applicable, any derivatives used to implement the E/S strategy; › state “More product-specific information can be found on the website” and hyperlink
› the process for monitoring ongoing implementation of E/S strategy; relevant website information (see below).
2
The only permitted deviations from the Level 2 disclosure templates are in respect of colour and font type and size.
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W E B S I T E D I S C LO S U R E S A N N UA L R E P O R T D I S C LO S U R E S
Mandatory disclosure template 3 to be used to disclose key ex-post strategy and asset allocation information in
Expansion of prospectus disclosures (no mandatory disclosure template prescribed for website disclosures)
period reports after 1 January 20224
Disclose the following in a separate website section titled ‘Sustainability-related disclosures’ clearly In the main body of the report, disclose:
identifying the relevant fund(s) their E/S strategy(ies): › main-body prospectus disclosures
› summary: two-page summary of required website disclosures in Manager’s home Member
State language and, if marketing on a cross-border basis, the official language(s) of relevant In an annex to the report, disclose:
host Member State(s); E/S strategy
› prominent statement that “This financial product promotes environmental or social › extent to which E/S strategy was successfully implemented;
characteristics, but does not have as its objective a sustainable investment” (to differentiate › performance of sustainability KPIs used to measure success in implementing that strategy
the fund from Dark Green funds); along with a historical comparison (if available) and any derivatives used as a part of the
› strategy: prospectus disclosures relating to the fund’s E/S strategy and the planned asset E/S strategy;
allocation, distinguishing between direct exposures in investee entities and all other types
of exposures to these entities; Asset allocation
› Sustainable Investments: if the planned asset allocation includes non-Taxonomy › list, in descending order of size, top 15 investments including the sector and countries of
aligned Sustainable Investments, explain how such investments do not significantly investments;
harm environmental or social objectives taking account of mandatory, and any relevant › ex-post prospectus asset allocation information reflecting economic sectors, in particular,
optional, KPIs annexed to Level 2 Rules and investments’ alignment with OECD Guidelines any fossil fuel sectors and any Taxonomy-aligned Sustainable Investments;
for Multinational Enterprises and UN Guiding Principles on Business and Human Rights;
› actions taken to implement the E/S strategy;
› methodologies for measuring the successful implementation of the E/S strategy using the
› if applicable, performance of the reference benchmark.
KPIs disclosed in the prospectus, any limitations to the methodologies and actions taken
to address limitations;
› data sources for implementing E/S strategy including their limitations, actions to address
any limitations, measures to ensure data quality, data processing details, proportion of
estimated data and limitations to the data;
› due diligence on underlying investments, including relevant internal and external controls
in place;
› engagement policies forming part of E/S strategy, including any management procedures
for sustainability-related controversies in investee companies;
› benchmark (if applicable) used to implement E/S strategy, how the benchmark is aligned
with the E/S strategy including input data, methodologies used to select data, rebalancing
methodologies, index calculation details and, if applicable, a link to the benchmark
administrator’s website.
3
The only permitted deviations from the Level 2 disclosure templates are in respect of colour and font type and size.
4
SFDR requires periodic reports, irrespective of the financial year the subject of the report, to comply with these disclosure obligations from 1 January 2022.
However, the ESAs have recommended that the Commission delay the application of the Level 2 Rules relating to periodic report disclosures such that the
requirements apply to periodic reports relating to financial years commencing on or after 1 January 2022.
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asset allocation
› the planned asset allocation split between (i) Sustainable Investments and (ii) all other investments;
Dark Green Fund › whether the purpose of ‘other’ investments ((ii) above) is:
• hedging;
Disclosure Requirements • cash held for ancillary liquidity; or
• investments for which there is insufficient data to classify as Sustainable Investments;
and are ‘other’ investments subject to any minimum environmental or social safeguards;
› if (i) includes Environmentally Sustainable Investments, include graphical representation of
the planned asset allocation (percentage) to Taxonomy-aligned Sustainable Investments;
› if disclose planned asset allocation to Taxonomy-aligned Sustainable Investments, include:
DA R K G R E E N F U N D P R O S P EC T U S D I S C LO S U R E S • a statement that the underlying activities of such investments are Taxonomy-aligned
activities and if this is subject to external third-party review, the name of the relevant
auditor or third party;
Mandatory disclosure template 5 to be used to disclose key sustainable strategy and planned asset allocation
information • whether Taxonomy-alignment of non-financial investee companies is measured by
turnover or CapEx or OpEx and reason for choice;
In the main body of the prospectus disclose that: • data sources if not using public disclosures from investee companies; and
› Sustainable Investment information is available in the annex (see below); • the minimum share of transitional and enabling activities;
› if (i) includes non-Taxonomy aligned Sustainable Investments:
In an annex to the prospectus, disclose:
• minimum share of non-Taxonomy-aligned Sustainable Investments and reasons for
prominent statements
such investments; and
› that the Fund has sustainable investment as its objective (to differentiate it from Light
• how such investments comply with SFDR ‘do not significantly harm’ principle using the
Green funds);
adverse impact KPIs appended to Level 2 Rules and their alignment with the OECD Guidelines
› whether the fund invests in Taxonomy-aligned Sustainable Investments; for Multinational Enterprises and UN Guiding Principles on Business and Human Rights;
investment strategy adverse sustainability impacts
› the fund’s environmental and/or social objectives and, if applicable, Taxonomy environmental › whether the fund assess the adverse Sustainability Impacts of investments;
objectives (E/S objectives);
› the binding environmental or social elements of the fund’s investment strategy (E/S reference benchmark (if applicable)
strategy) to achieve E/S objectives and the sustainability KPIs used to measure success in › any benchmark used to implement the funds’ E/S objectives;
implementing that strategy;
› how the reference benchmark takes sustainability factors into account in a way that is
› the policy for the assessment of investee companies’ good governance practices including continuously aligned with the fund’s E/S objectives;
with respect to sound management structures, employee relations, remuneration of staff
› how continuous alignment of the fund’s strategy with the methodology of the index is ensured;
and tax compliance;
› how the benchmark differs from a relevant broad market index;
› if applicable, any derivatives used to implement the E/S strategy and how they support E/S
objectives;
carbon emission reduction objectives (if applicable)
› the process for monitoring ongoing implementation of E/S strategy;
› where the EU Climate Transition or EU Paris-aligned benchmark calculation methodology
can be found; or
› if no EU Climate Transition Benchmark of EU Paris-aligned Benchmark is available, explain
this and how the carbon emission reduction objective is ensured in view of achieving the
objectives of the Paris Agreement and the extent the fund complies with the methodological
requirements under Benchmarks Supplementary Regulation (2020/1818);
further information
5
The only permitted deviations from the Level 2 disclosure templates are in respect of colour and font type and size.
› state “More product-specific information can be found on the website” and hyperlink
relevant website information (see below).
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DA R K G R E E N F U N D W E B S I T E D I S C LO S U R E S DA R K G R E E N F U N D A N N UA L R E P O R T D I S C LO S U R E S
Mandatory disclosure template 6 to be used to disclose key ex-post strategy and asset allocation information in
Expansion of prospectus disclosures (no mandatory disclosure template prescribed for website disclosures)
period reports after 1 January 20227
Disclose the following in a separate website section titled ‘Sustainability-related disclosures’, clearly In the main body of the report, disclose:
identifying the relevant fund(s) and their E/S objectives: › main-body prospectus disclosures
› summary: two-page summary of required website disclosures in Manager’s home Member
State language and, if marketing on a cross-border basis, the official language(s) of relevant In an annex to the report, disclose:
host Member State(s); achievement of E/S objectives
› do no significant harm (DNSH): explain how non-Taxonomy aligned Sustainable › extent to which E/S objectives were achieved;
Investments comply with SFDR DNSH principle using the adverse impact KPIs appended › performance of sustainability KPIs used to measure such achievement along with a
to Level 2 Rules and alignment with the OECD Guidelines for Multinational Enterprises and historical comparison (if available) and any derivatives used to achieve E/S objectives;
UN Guiding Principles on Business and Human Rights;
› sustainable objectives: describe the fund’s E/S objectives; Asset allocation
› strategy: prospectus disclosures relating to the fund’s E/S strategy and the planned asset › list, in descending order of size, top 15 investments including the sector and countries of
allocation, distinguishing between direct exposures in investee entities and all other types investments;
of exposures to these entities; › ex-post prospectus asset allocation information reflecting economic sectors, in particular,
› Sustainable Investments: describe ongoing process for monitoring E/S objectives and any fossil fuel sectors and any Taxonomy-aligned Sustainable Investments;
sustainability KPIs and related internal/external control mechanisms; › actions taken to implement the E/S strategy;
› methodologies for measuring the successful implementation of the E/S objectives using › if applicable, performance of the reference benchmark;
the KPIs disclosed in the prospectus, any limitations to the methodologies and actions
› if applicable, contribution of fund to Paris Agreement objectives.
taken to address limitations;
› data sources for implementing E/S objectives including their limitations, actions to address
any limitations, measures to ensure data quality, data processing details, proportion of
estimated data and limitations to the data;
› due diligence on underlying investments, including relevant internal and external controls
in place;
› engagement policies forming part of strategy for E/S objectives, including any management
procedures for sustainability-related controversies in investee companies;
› benchmark (if applicable) used to implement E/S objectives, how it is aligned with the E/S
objectives including input data, data selection methodologies, rebalancing methodologies,
index calculation details and, if applicable, a link to the benchmark administrator’s website;
› carbon emissions reduction objective: include prospectus disclosures
6
The only permitted deviations from the Level 2 disclosure templates are in respect of colour and font type and size.
7
SFDR requires periodic reports, irrespective of the financial year the subject of the report, to comply with these disclosure obligations from 1 January 2022.
However, the ESAs have recommended that the Commission delay the application of the Level 2 Rules relating to periodic report disclosures such that the
requirements apply to periodic reports relating to financial years commencing on or after 1 January 2022.
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S E C T I O N 3 : DATA S O U R C ES
Fo r c a l c u l a ti n g S u s t a i n a b i l i t y I m p a c t s , l e v e l o f S u s t a i n a b l e I nv e s t m e n t s
a n d Ta xo n o my- a l i g n m e n t o f f u n d p o r t f o l i o s
The following highlights the data priority waterfall under Level 2 Rules and potential sources for each:
DATA TYPE SOURCE & TIMING TO AVAILABILITY Disclosure of alignment with/reporting under voluntary standards including:
Corporate (debt/equity) • Task Force on Climate-Related Financial Disclosures (TCFD); Available
• Sustainability Accounting Standards Board (SASB)
Non-Financial Reporting Directive (NFRD) mandates sustainability disclosures June 2018
• Global Reporting Initiative (GRI)
for large EU companies with >500 employees, public interest companies,
OUTPUT OF • International Integrated Reporting Council (IIRC)
banks and insurers
INTERNAL • Climate Disclosures Standards Board (CDSB)
Companies in-scope of NFRD must disclose levels of Taxonomy-alignment January 2022 INVESTMENT • ICMA green/social/sustainability-linked bond principles
RESEARCH • LMA Green/Social/Sustainability-Linked Loan Principles
Corporate Sustainability Reporting Directive (CSRD) amends and extends January 2024
• ISO 26000
scope of NFRD to mandate sustainability disclosures (aligned with the SFDR
and Taxonomy) for all large companies and all EU and non-EU companies • ISO 32210 (Framework for sustainable finance – Principles and guidance) Planned
(other than micro-enterprises) listed on an EU market including EU subsidiaries • ISO 32220 (Sustainable Finance – Basic concepts, key initiatives)
of non-EU companies with a 3-year phase-in for EU listed SMEs • ISO 14100 (Green Finance Assessment of Green Financial Projects)
EU Green Bond Standard (GBS) No fixed timeline (EU
consultation closed ACQUIRED
October 2020 with EU FROM
GBS legislative proposal THIRD- Sustainability-related rating, data and research providers e.g. credit rating agencies,
expected as part of EU
PARTY DATA benchmark providers, data vendors, consultancies and specialised providers, provide
Renewed Sustainable
SOURCED PROVIDERS/ sustainability indicators, ratings and scorings to market.
Finance Strategy,
DIRECT EXTERNAL
scheduled for adoption
FROM in H1 2021)
EXPERTS
INVESTEE
IOSCO / IFRS Sustainability Standards Board (SSB) compliant sustainability No fixed timeline
COMPANY
reporting (proposal for SSB
OR ISSUER
establishment expected
September 2021)
BASED ON
Financial Institution exposures REASONABLE Based on the above.
Under CRR, CRD, IFD & IFR Pillar 3 Disclosures large financial institutions June / December 2022 ASSUMPTIONS
issuing listed securities and Class 2 firms must disclose detailed metrics that
allow investors assess ESG risks and vulnerabilities of financial institutions
Indices
Benchmark methodology document and benchmark statements must include December 2020
disclosure on ESG factors
Other Funds
SFDR pre-contractual and website disclosures March 2021
SFDR Level 2 pre-contractual and website disclosures and SFDR periodic January 2022
disclosures
AIFMD, UCITS, Solvency II, IDD and MiFID II Sustainability Risk disclosures October 2022
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SECTION 4:
M A N DATO RY A N D O P T I O N A L K P I
The following list of mandatory and optional adverse Sustainability Impact KPIs is extracted from the
ESA-adopted Level 2 measures dated 2 February 2021.
M A N DATO RY K P I
C O R P O R AT E I N V E S T M E N T S C O R P O R AT E I N V E S T M E N T S
1. GHG emissions (Scope 1, 2 and from 1 January 2023, Scope 3 and total GHG emissions) 13. Violations of UN Global Compact principles and Organisation for Economic Cooperation and
Development (OECD) Guidelines for Multinational Enterprises
2. Carbon
14. Lack of processes and compliance mechanisms to monitor compliance with UN Global
3. GHG intensity of investee companies
Compact principles and OECD Guidelines for Multinational Enterprises
SOCIAL
E N V I R O N M E N TA L
4. Share of investments in companies active in the fossil fuel sector
15. Unadjusted gender pay gap
5. Share of non-renewable energy consumption and production
16. Board gender diversity
6. Energy consumption intensity per high impact climate sector
17. Exposure to controversial weapons (anti- personnel mines, cluster munitions, chemical
7. Activities negatively affecting biodiversity- sensitive areas weapons and biological weapons)
8. Emissions to water S OV E R E I G N A N D S U P R A N AT I O N A L I N V E S T M E N T S
9. Hazardous waste ratio 18. Investee countries subject to social violations
R E A L E S TAT E I N V E S T M E N T S
10. Exposure to fossil fuels through real estate assets
11. Exposure to energy-inefficient real estate assets
S OV E R E I G N A N D S U P R A N AT I O N A L I N V E S T M E N T S
12. GHG intensity
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O P T I O N A L K P I : choose at least one environmental and one social KPI
C O R P O R AT E I N V E S T M E N T S C O R P O R AT E I N V E S T M E N T S
1. Emissions of inorganic pollutants 1. Investments in companies without workplace accident prevention policies
2. Emissions of air pollutants 2. Rate of accidents
3. Emissions of ozone depletion substances 3. Number of days lost to injuries, accidents, fatalities or illness
4. Investments in companies without carbon emission reduction initiatives 4. Lack of a supplier code of conduct
5. Breakdown of energy consumption by type of non-renewable sources of energy 5. Lack of grievance/complaints handling mechanism related to employee matters
6. Water usage and recycling 6. Insufficient whistleblower protection
7. Investments in companies without water management policies 7. Incidents of discrimination
8. Exposure to areas of high-water stress 8. Excessive CEO pay ratio
9. Investments in companies producing chemicals 9. Lack of a human rights policy
E N V I R O N M E N TA L
10. Land degradation, desertification, soil sealing 10. Lack of due diligence
11. Land degradation, desertification, soil sealing 11. Lack of processes and measures for preventing trafficking in human beings
12. Investments in companies without sustainable oceans/seas practices 12. Operations and suppliers at significant risk of incidents of child labour
SOCIAL
13. Non-recycled waste ratio 13. Operations and suppliers at significant risk of incidents of forced or compulsory labour
14. Natural species and protected areas 14. Number of identified cases of severe human rights issues and incidents
15. Deforestation 15. Lack of anti-corruption and anti-bribery policies
16. Share of securities not certified as green under a future EU legal act setting up an EU Green 16. Cases of insufficient action taken to address breaches of standards of anti-corruption and
Bond Standard anti- bribery
S OV E R E I G N A N D S U P R A N AT I O N A L I N V E S T M E N T S 17. Number of convictions and amount of fines for violation of anti-corruption and anti-bribery
laws
17. Share of bonds not certified as green under a future EU act setting up an EU Green Bond
Standard S OV E R E I G N A N D S U P R A N AT I O N A L I N V E S T M E N T S
R E A L E S TAT E I N V E S T M E N T S 18. Average income equality score
18. GHG emissions (Scope 1, 2 and from 1 January 2023, Scope 3 and total GHG emissions) 19. Average freedom of expression score
19. Energy consumption intensity 20. Average human rights performance
20. Waste production in operations 21. Average corruption score
21. Raw materials consumption for new construction and major renovations 22. Non-cooperative tax jurisdictions
22. Land artificialisation 23. Average political stability score
24. Average rule of law score
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CONTACT US
If you require any further information please contact Lorena Dunne, Nessa Joyce or your usual
William Fry contact.
Lorena Dunne Nessa Joyce
PARTNER SENIOR ASSOCIATE
+44 20 79610896 +353 1 489 6417
lorena.dunne@williamfry.com nessa.joyce@williamfry.com
DUBLIN | CORK | LONDON | NEW YORK | SAN FRANCISCO | S I LI C O N VALLE Y
T: + 3 5 3 1 6 3 9 5 0 0 0 | E : i n fo @ w i l l i a m f r y.c o m
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