Do no significant harm (DNSH)
Products must (in our view) have regard to PAI indicators when measuring DNSH where they have made or committed to make "sustainable investments". This will catch Article 9, Article 8+ products, but not other Article 8 products which have not committed to make a sustainable investment. Such products must also explain whether the sustainable investment is aligned with certain international standards namely the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
Recital 27 provides that both Article 8 and Article 9 products should "include information on the policy of the financial market participant to assess good governance practices of investee companies". Draft RTS Articles 15 and 22 require that to be included in pre-contractual disclosures. Draft RTS Articles 36 and 49 require website disclosures to include fuller details of the policy to assess good governance “including with respect to sound management structures, employee relations, remuneration of staff and tax compliance”. There is no further elaboration in the RTS as to how this impacts products investing in asset classes where this requirement will prove to be difficult (e.g. certain types of credit and non-control investment strategies).
The RTS contain revised templates for pre-contractual (e.g. AIFMD Article 23) and periodic (e.g. AIFMD Article 22 annual report) disclosures in respect of Article 8 and Article 9 products (Annex II - V, beginning on page 82 of the document).
The revised templates will need to be used from January 2022 and will, we think, need to be trailed in a short summary in the front-end of the relevant disclosure or report, with the templates scheduled to the document.
The templates take a very much "one-size fits all" approach, not distinguishing between information which a retail investor could digest or an institutional investor would find useful. This, the ESAs expressly acknowledge, is a problem: they say that this is a sub-optimal situation leaving the disclosures "unfit for purpose for both types of documents", but their hands are bound by the primary legislation.
When populating these templates, firms will need to have regard to the granular rules in the relevant part of the RTS (in terms of substance, presentation and data cut) in order to ensure that all relevant disclosure requirements are addressed. Certain data metrics need to be given on a year-on-year basis so as to give five years' worth of data (although these do not look back beyond the first SFDR reporting period).
Firms with, for example, live in-scope Article 8 or 9 funds should check these detailed requirements and identify any red-flags, important ambiguities or items requiring significant data lifts at an early stage in order to avoid any surprises.
Firms with so-called "Article 9(3) products" (those which have a reduction in carbon emissions as an investment objective) should note specific disclosure requirements as to alignment with, and achievement of the objectives of, the Paris Agreement via a specified benchmark or, if none is available, what other steps are taken and the extent to which they are consistent with underlying detailed methodological requirements set out in separate EU legislation.