French regulator issues minimum ESG reporting standards for sustainability funds

Rules immediately apply to all new funds sold in France.

France’s securities regulator, the AMF (Autorité des Marchés Financiers) has issued a set of minimum standards to test what fund managers tell investors in their marketing about their ESG approaches against what it actually means for their investments.

The regulatory move comes as EU countries increasingly look at adoption of the regulatory initiatives of the EU in its new Action Plan on Sustainable Finance.

The AMF said its new sustainability ‘doctrine’ was designed to protect investors amid a rising number who are investing in ESG labelled funds.

It will immediately apply to all new funds being sold in the French market, while existing funds have until November to update their commercial and regulatory documentation.

The regulator said fund managers would have to show ‘measurable objectives’ in all fund regulatory documents, such as the investment prospectus, for all so-called extra-financial criteria allied to investments.

It said these should be significant objectives in order to demonstrate a real difference between investment approaches.

To measure the best-in-class ESG approach used by many French fund managers – which selects the top companies based on their ESG scores – the regulator said it would use quant rules on the strategy issued by the SRI Label produced by the French Finance Ministry.

As an example, it said a fund selecting best-in-class companies should at a minimum have removed the 20% of lowest ESG scoring companies from a defined company universe.

For other ESG investment approaches, the AMF said fund managers would have to demonstrate the significance of its ESG approach.

The AMF said its new rules were a first step in improvements on asset manager ESG reporting, but that it would not iron out what it sees as a problem in the information communicated by fund managers to investors. It said that important ESG information such as the quality and pertinence of so-called extra-financial data, or the impact measurement of investment strategies, were not covered in the initial version of the doctrine.

It said this might change depending on the evolution of market practices and EU transparency regulations. The AMF said it was working, however, on communication guidance for funds that use ESG data but don’t market themselves as specific ESG funds.

In August last year, RI reported that five French asset managers running SRI funds or integrating ESG into their investments received a visit from an AMF team of investigators to examine their sustainability policy, practices and reporting as part of tighter supervision.