Navigating SFDR ReClassification
Since its introduction in March 2021, Sustainable Finance Disclosure Regulation (SFDR) continues to be an evolving landscape.
SFDR introduced a harmonized framework for sustainability-related disclosures in the European Union. It includes three primary classifications: Article 6, Article 8, and Article 9. Article 6 covers funds that do not have a specific sustainable investment objective but may or may not take sustainability factors into account. Article 8 applies to funds that promote environmental or social characteristics, while Article 9 applies to funds with a specific sustainable investment objective.
Due to high demand from investors, the industry continues to see growing interest among fund managers and investment firms to align their funds with Article 8 classification, which may result in a reclassification for existing funds which were previously Article 6.
One of the key aspects of Article 8 funds is proving that the fund ‘promotes’ environmental or social characteristics. There are a number of ways such characteristics can be expressed in the fund documentation including the reference to relevant indicators for principles adverse impact. It is envisaged that SFDR may be further refined following the industry’s publication of Level II Disclosures, however much debate remains on the definition of ‘promotion’ and a fund’s extent thereof.
Many fund managers and investment firms have been assessing their funds to determine the appropriate SFDR classification and align with investors' increasing demand for sustainable investments. To prevent greenwashing, a robust governance framework will ensure that the transition of an existing fund to Article 8 will comply will all aspects of SFDR. As fund managers strive to signal their commitment to sustainability and meet investor expectations, the board and the management company must ensure that all relevant due diligence is performed on the proposed change to investment process/strategy and fund disclosures.
The Company Secretary must ensure that any proposal for SFDR reclassification is adequately minuted at a board meeting. The minutes should reference all relevant documentation in support of the proposal, in addition to capturing challenge and discussion from the board, which should be both thorough and robust.
Should an SFDR reclassification be approved by the board, a resolution should be included in the minutes to reflect the approval of the transition, in addition to any follow-up action points, which may include amending the fund documentation. Following this, it is best practice that a follow-up discussion be held by the board and all relevant stakeholders, and a resolution be drafted to reflect the final approval of the changes to the investment strategy/fund documentation that reflect Article 8 requirements.
The minutes remain the legal record of discussion for an SFDR reclassification, and can help provide colour on the justification for same from both an auditor and regulator perspective.
It is essential to ensure that minutes reflect a strong governance framework. Ratio can provide specific insights into this evolving landscape. Reach out to Ratio today to learn how we can add further value to your client base.