2022 will bring many changes to our industry and the related fund documentation.

We are always happy to assist you in all challenges ahead. In order to provide the best possible service to you, it would be helpful for us if you could complete our survey:

If you had 3 wishes that would make your life easier when it comes to ESG/SFDR, what would these be? (multiple answers possible)

• Full support to produce your fund documentation
• Automating updates to reduce delivery times
• Automating updates to improve consistency
• Coordination & communication support between different teams

What are your biggest challenges? (multiple answers possible)

• Filing deadlines
• Volume of updates
• Managing multiple updates
• Keeping updates consistent (across various documents)
• Internal communication between teams/ involved parties
• Translation & integration of updated fund documentation
• Layout

For which documents would you need assistance? (multiple answers possible)

• Prospectus
• Annual and semi-annual reports
• UCITS KIIDs
• PRIIP KIDs
• Factsheets
• Website updates
• Regulatory forms
• Shareholder mailings
• Marketing and sales documents (presentations, brochures, etc. …)

Tell us more about your SFDR requirements in the comments. If you would like you can also fill out our survey here; and send it to prisma(at)prisma.lu. We thank you for your time!

Introduction

The EU has introduced the Sustainable Finance Disclosure Regulation (SFDR) in 2019,appliying to financial market participants (FMP), such as asset managers, banks, financial advisors. The first level has come into effect on 10 March 2021 and will continue rolling out deadlines for disclosures that are required by FMPs. This regulation is focused within Europe but is being adopted by other countries around the globe. Its aim is to assist European commitments on climate control and Sustainability objectives,  encouraging investors to chase greener opportunities which  do no harm to the ESG (Environmental, Social and Governance).

SFDR Purpose

The purpose of the SFDR is to reorientate FMPs capital towards more sustainable investments. It’s also designed to ensure that all disclosures are transparent, easy to understand and clearly show the sustainability characteristics of their products, by doing this they can also counter greenwashing.

Greenwashing is the process of providing misleading information on how sustainably friendly a company’s products are. Often rebranding or repackaging, saying recycled materials are used, exaggerating this fact when only 5% of their material may be recycled would be some examples of green washing. With the SFDR requiring a paper trail of sources and evidence, they hope to eliminate this misleading information.

SFDR Scope Impacted Funds / Companies

The SFDR applies to FMPs, these are defined as investment firms such as asset managers. The financial products they offer include mutual funds, insurance-based investment products, private pensions among others..

SFDR is applicable to Alternative Investment Fund (AIF), portfolio managed services or Undertakings for the Collective Investment in Transferable Securities (UCITS) funds which are subject to be classified as article 6, 8 or 9 products to clearly show how sustainable a fund is.

• Article 6
  • Covers funds which do not have any sustainable investments and could involve stocks excluded by the ESG.
• Article 8 (Light Green)
  • Covers products that promote ‘E’ or ‘S’ whether or not the investment is made out of ESG components, or the product was not made to have an impact on the environment or society.
• Article 9 (Dark Green)
  • The objective is to specifically impact ‘E’, ‘S’ or ‘G’, and the majority of the components are usually ESG investments.

What do you need to do? Timeline and Documents to be updated

• 10 March 2021
  • (Level 1) SFDR comes into effect, requiring FMPs to disclose SFDR related information at an entity level (i.e, if they comply or explain why they don’t).
• 1 January 2022
  • The first Taxonomy Alignment (Level 1) comes into effect, requiring additional disclosures on climate change. The Taxonomy Alignment is a guiding force to assist SFDR in identifying ‘green’ products.
• 1 January 2023
  • Regulator Technical Standards Final Draft (Level 2) comes into effect. The Regulatory Technical Standard is a guidebook on how to comply with SFDR, defining terms and deadlines for all those it applies to.
  • Second Reference Period (Level 2) – Second Taxonomy Alignment comes into effect, requiring additional disclosures on environmental funds. PAI disclosures at entity level and annual reporting on PAI to begin.
• 30 June 2023
  • Firms that consider PAI must publish annual PAI statements (Level 2) on First Reference Period by 30 June each year on the most recent reference period.

Taxonomy Regulation

The Taxonomy Regulation is a helping force assisting the SFDR in identifying ‘green’ products. It requires additional information on the objectives set out in the SFDR. The first two objectives lie under the climate category, climate change mitigation and climate change adaption. These are considered our first Taxonomy Alignment which is due the 1 of January 2022. We also have the following four objectives:

• the sustainable use and protection of water and marine resources;

• the transition to a circular economy;

• pollution prevention and control;

• the protection and restoration of biodiversity and ecosystems.

These are considered our Second Taxonomy alignment which is due 1 January 2023. During the Taxonomy Alignments, all taxonomy related disclosures will need to be updated with this additional information.

ESG and Sustainable Finance; and the role of Europe

Europe has a large role to play here, becoming the world leader in sustainable investments and working toward a greener more sustainable future. We can already see other countries adopting the European SFDR into their strategies or using the EU SFDR as basis for their national legal frameworks such as the UK.

Non-EU investment firms are also in scope of SFDR if they have any products that are marketed in the EU, meaning non-EU firms will be required to make disclosures at the same level.

Pitfalls, things to look out for

SFDR has several pitfalls though, which we should all look out for, given that it’s still in the very early days of development and adoption. Without an industry standard of rating/scoring, inconsistency is a common issue throughout FMPs. A company can have two entirely different ESG ratings from two data providers, as currently this is down to the ESG focus of the one rating.

Data gathering is another issue, putting aside the large quantities and inconsistent data, some investee companies are not yet required to disclose certain ESG related data until later dates, although others are required to release disclosures on this data very soon which leaves a data gap.

As SFDR is still a very early life stage, one can expect through experience and learning, once a higher level of maturity has been reached, that these pitfalls will become non-issues within the next few years.

What can Prisma do

At Prisma, we can help produce and update your documentation in a professional typeset layout, as well as translating these documents into all Western, European and Asian languages.

Worried about distribution of this information across the many platforms? Don’t worry, we’ve got you covered there, too. We offer physical and digital mailing distribution and can also create websites to display your disclosures. Find out how we can help today at https://www.prisma.lu/our-services/ or contact us at https://www.prisma.lu/contact/.

**** 30 June 2021 ****

The new Sustainable Finance Disclosure Regulation (SFDR) deadline is approaching.

Companies with more than 500 employees need to issue a Principal Adverse Impact (PAI) statement at entity level for the end of the month.

Article published on 24 November 2020 www.igniteseurope.com

Luxembourg has passed a law designed to make its financial services industry more digital, in a move that will enable local lenders and investment firms to electronically store bonds and other assets, Luxembourg Times reports.

Under the new legislation, approved by the parliament of the Grand Duchy yesterday, companies and investors will be able to store digital securities using blockchain technology.

The move comes after local lawmakers approved a legal framework in 2019 that boosted blockchain technology by granting transactions conducted through the technology the same legal status as traditional ones.

Luxembourg Times says the first local real estate fund handed out digital tokens to clients in October last year as it moved to blockchain technology to reduce costs.

Earlier this week FundsDLT, a Luxembourg-based blockchain-based technology platform for the investment fund industry that was initiated by the Luxembourg Stock Exchange, processed a fund purchase transaction that was settled via Deutsche Börse’s post-trade services provider Clearstream.

Zürcher Kantonalbank and Clearstream said this represented their first successfully processed live blockchain-based end-to-end fund transactions, with the two firms highlighting that the processing time for an investor order was reduced from several hours to just a few minutes.

Alfi said at its global fund distribution conference that blockchain would have a “major impact” on the fund industry, affecting the entire value chain from launching to distributing funds, and from managing fund accounts to the settling of trades.

The fund body warned, however, that improvements were necessary to enable blockchain technology to process large amounts of data fast.

Article published on 24 November 2020 www.igniteseurope.com

The Luxembourg financial regulator has unveiled new requirements to compel asset managers to pay more attention to environmental, social and governance risks.

The new rules put Luxembourg market participants at the forefront of tackling sustainability risks as EU regulatory amendments on ESG integration have yet to be finalised.

The Commission de Surveillance du Secteur Financier published a new circular earlier this week compelling asset managers and other financial institutions to integrate sustainability factors into their governance procedures.

The circular applies to firms carrying out investment activities or services under Mifid II, such as managing segregated mandates or providing investment advice.

According to the CSSF, firms should give ESG factors the same prominence as liquidity and solvency risks when considering the “‘viability of [their] business model”.

The new obligations come as EU policymakers put the finishing touches to a number of new rules to compel senior managers to take account of ESG risks.

Amendments to the Ucits directive, Mifid II and the Alternative Investment Fund Managers Directive are expected to be finalised in the coming weeks, while firms must also contend with the sustainable finance disclosure regulation, which comes into force next March.

Sebastiaan Hooghiemstra, Luxembourg-based associate at NautaDutilh, says many firms have already begun integrating sustainability risks into their investment decision making processes in order to comply with SFDR.

SFDR, which requires firms to make disclosures on ESG factors at both a company and product level, is also leading firms to incorporate sustainability risks into other governance procedures such as remuneration policies, adds Mr Hooghiemstra.

Other EU regulators have also challenged firms to do more to meet their sustainability objectives.

Article published on 24 November 2020 www.igniteseurope.com

The Luxembourg financial regulator is to launch a fast-track procedure for environmental, social and governance disclosures as fund firms battle to meet impending EU rules.

The Commission de Surveillance du Secteur Financier says it will rely on fund boards to self-certify their compliance with the sustainable finance disclosure regulation ahead of the looming March deadline.

The implementation of SFDR, which requires asset managers with more than 500 employees to disclose the negative environmental and social impacts of their investments, has been beset with problems.

Although the European Commission recently announced that it will delay the imposition of the underlying technical standards for the regulation, the rules will still come into force in March, with asset managers required to produce “high-level and principle-based” disclosures from next year.

Fund houses complain that this vagueness over what exactly they have to disclose coupled with a lack of available data from investee companies make it difficult for firms to adequately comply with the regulation in time.

Marco Zwick, director at the CSSF, says the regulator is “mindful of the difficulties that the market may encounter” with SFDR compliance and will introduce a fast-track procedure for prospectus updates.

Mr Zwick, who was speaking yesterday at a conference organised by the Association of the Luxembourg Fund Industry, says asset managers should “limit their changes to the prospectus in particular” as otherwise the CSSF may not be able to process disclosures in time for the March deadline.

Fund boards will also have to self-certify that their funds are meeting the requirements of SFDR alongside any fast-track applications to the CSSF.

“We are not going to challenge everything from day one but we are going to do a number of checks and we are also going to do some ex-ante verifications,” says Mr Zwick.

Mr Zwick says these checks and verifications will be “on a sample basis” as the CSSF lacks the capacity to process documents for the some 15,000 funds and sub-funds under its supervision.

Lawyers have warned that the two-tier implementation stage for the underlying technical standards could also see asset managers having to submit a new set of more detailed updates to regulators within the next 12 months.

The three European supervisory authorities concluded a consultation on product disclosure templates that firms could use last month.

According to the ESAs, disclosure formats must be standardised but also be able to be deployed for various purposes, including prospectus updates and annual reports.