National regulators’ ESG fund requirements trigger SFDR fragmentation fears

ESG fund marketing rules ‘spilling over’ on disclosure and transparency requirements under SFDR

Concerns are mounting that the implementation of the Sustainable Finance Disclosure Regulation (SFDR) will become fragmented across the EU as a number of European financial regulators are consulting on or have issued requirements for sustainability and ESG funds. 

These concerns are exacerbated by the fact that the European Commission is yet to respond to a letter the European Supervisory Authorities (ESAs) sent on 7 January asking for a clarification on, for example, the definitions of Article 8 – products promoting environmental or social characteristics – and Article 9  – products pursuing such objectives. A Commission spokesperson told RI it is preparing “several Q&As” in response to the letter.

All national regulators contacted by RI say that what they have published or are consulting on is not linked to the SFDR. Instead, they are guidelines or rules for funds that are marketed as ESG or sustainability funds. The regulators say they are not suggesting thresholds for Article 8 or 9. 

But the efforts – some of which are set out in documents largely focusing on EU sustainable finance regulations – are creating uncertainty for market participants who believe some of the guidance or proposed rules will have repercussions on SFDR disclosure for asset managers active in these markets. It could also mean that one product ends up qualifying under different SFDR articles depending on the country it is sold in, sources told RI.    

‘The first thing I ask my clients when they approach me about complying with SFDR is ‘are you based in France’ and they usually say ‘no, thank goodness’ because the French rules are so strict’ – Financial Advisor

The most recent national supervisor to provide ESG fund guidance is Spain’s National Securities Market Commission (CNMV). On 1 June, it published a document with “criteria on the application of new European regulations on sustainability in financial services”. It says that in order to market a product as an SRI product, more than 50% of the fund needs to follow an SRI strategy.    

A Spain-based financial regulation lawyer told RI this means he would advise managers to ensure any product they classify as Article 8 – for which managers would mostly also be looking to include ESG in their marketing – from now on to meet the 50% requirement. The 50% threshold is effectively being interpreted as a minimum expectation for the Article 8 category, he explained. 

A spokesperson for CNMV told RI the guide and 50% threshold cover funds that want to include “ESG-related words” in their names and marketing. With regards to Article 8 and 9, the guide “only makes reference to the SFDR Regulation”, the spokesperson said. 

However, an industry source who wanted to be anonymous said: “Saying that national marketing rules and requirements have no impact on the way SFDR definitions or categories are going to be used by the market is a completely artificial distinction.” 

“If you can’t sell a product the way you want it, unless it satisfies these requirements, then it’s pretty close to a minimum standard you're imposing,” the source said. 

A director at a European securities regulator who also wanted to remain anonymous said that while regulators are not setting out rules or thresholds for Article 8 or 9 classifications, he understands that this is the practical implication for asset managers. Most managers of funds falling within these disclosure categories would be expected to also want to market themselves as ESG or sustainability funds, he said. 

In Germany, regulator BaFin earlier this year drafted and informally consulted with asset managers on guidelines for sustainable investment funds. This has also caused concern and confusion about potential SFDR implications in the market. The proposals stipulate, for example, that a fund labelled as or marketed as a sustainable investment fund must be at least 90% invested in “sustainable assets”.   

A German industry source closely following the BaFin consultation said he believes the suggestion would effectively gold-plate the EU’s SFDR rules and that the practical implication would be that German products need to meet the 90% threshold to be considered Article 9 funds. 

Speaking on an RI Europe SFDR panel yesterday, Christopher Knapp, a Germany-based Vice-President of MSCI ESG Research, agreed, saying the BaFin efforts are “making some noise in the market” about gold-plating. He added that the proposed threshold could even mean that  “a fund calling itself ESG or sustainable couldn’t be an Article 8 fund anymore”.  And a response to the consultation by the German asset manager industry association BVI highlights concerns about the 90% threshold saying it is too high and the relationship between the suggestion and the Article 9 product category is unclear. 

A BaFin spokesperson denied any links between the guidelines and SFDR. “It is not our intention to give any guidance regarding the SFDR. The SFDR is neither affected nor interpreted by the draft of the BaFin Guidelines […[ The scope of our guidelines is limited to the drafting of the fund rules. Therefore, the BaFin Guidelines do not contain any minimum requirements regarding the classification of an investment fund within the system of the SFDR.”

But Victor van Hoorn, Executive Director, Eurosif, told RI that “what BaFin is doing will have SFDR repercussions whether they like it or not”. He explained: “If a regulator is seeking to define the investment policy, it will have a bearing on where a particular product sits: is it able or not to meet the thresholds defined? And therefore, it will also have implications for the transparency obligations it incurs. So defining the investment policy requirements will spill over into how you comply with the transparency requirements [of SFDR].” 

And there are early signs this is starting to materialise in France, where a doctrine has been in place for more than one year with minimum standards for funds marketed as ESG products. One financial advisor, not based in France, said: “The first thing I ask my clients when they approach me about complying with SFDR is ‘are you based in France’ and they usually say ‘no, thank goodness’ because the French rules are so strict”.

In January this year, AMF said in a document clarifying the relationship between SFDR obligations and the national requirements under the doctrine. It says it does not plan “at this stage” to specify the definitions in SFDR, but that  “in order to be able to present non-financial criteria as a key aspect of product communication […] promoting environmental and/or social characteristics as defined by Article 8 of the SFDR regulation as well as those with the objective of sustainable investment, as defined by Article 9, must meet the minimum standards defined by the position-recommendation [in the doctrine]”. 

The document also sets out what RI understands is an expectation – rather than requirement – for managers with Article 9 products that they will implement certain ESG approaches within the AMF doctrine for these products.

Meanwhile, Eurosif last week wrote to the Commission urging it to commit to developing EU minimum standards for ESG and sustainable investment funds to address market fragmentation risks. 

It said the SFDR focuses on transparency but does not set a standard for different types of products, which limits comparability and increases the risk of market fragmentation across the region. To address this and avoid the risk of mis-selling of green products, minimum sustainability standards should be developed “through a revision of SFDR”, the letter said. 

Related to this, Eurosif also recommended that the Commission develops guidelines for an EU green fund label and a transition fund label. The planned Ecolabel for financial products is “unlikely to see scale and uptake with diversified retail clients”, Eurosif said.

This was echoed at yesterday’s RI Europe panel today by Rodolphe Bocquet, Global Head of Sustainable Investment, Qontigo, when asked whether EU-wide minimum standards or thresholds for Article 8 or 9 products are needed. “I don’t think this should be part of SFDR, which is on transparency and disclosure, but it should fit into the labelling part. For the time [being], the Ecolabel is very niche, very environment-oriented and high level and I guess we need some other labels.”