The EU and Singapore press ahead with new regulations and guidance on ESG

Recommendations for asset managers

Governance & Strategy

·         Board must set the tone and define the asset manager’s approach to environmental risk management for:

o    different asset classes; and

o    across different investment strategies.

·         Managers must have in place a risk management framework to identify, address and monitor the risks associated with customers’ assets that they manage which is commensurate with the size and scale and complexity of the assets - such risks include environmental risks to the extent that it is material to the assets managed.

·         Board and senior management should maintain:

o   effective oversight of the asset manager’s environmental risk management and disclosure;

o   oversight over the integration of environmental risk into the investment risk management framework; and

o   where environmental risks are material to the assets under management, a senior management member or a committee should be put in place to oversee the environmental risk.

Research and Portfolio Construction

·         Asset managers should embed relevant environmental risk considerations in their research and portfolio construction processes if they have assessed them to be material.

·         They should consider the potential impact of the relevant environmental risk on an investment’s return potential, both Physical and Transition risks should be considered at the individual/portfolio level.

·         Asset managers should implement appropriate processes and systems to monitor, assess and manage the potential and actual impact of environmental risks on an ongoing basis, where material.

Stewardship

Encourage a change in culture or stewardship to help shape the corporate behavior, including of investee companies, through engagement, proxy voting and sector collaboration.

Stewardship at investee companies

Asset managers should have proper documentation to support its engagement efforts, and report on their stewardship initiatives including engagement with investee companies:

·         raising environmental issues and awareness;

·         influencing behaviour of investee companies to better manage and mitigate environmental risk;

·         gathering information to supplement existing environmental risk disclosures from investee companies;

·         encouraging investee companies to provide relevant and timely environmental risk data/clearer disclosures.

Disclosure

Asset managers should disclose their approach to managing environmental risk, as well as the potential impact of material environmental risk, to customers, including quantitative metrics such as exposures to sectors with higher environmental risk with the TCFD referenced as one source for the development of appropriate disclosures.

Meaning of promotion in the context of products which promote environmental or social characteristics (E&S)

1.      Will a product which includes the words ‘sustainable’, ‘sustainability’ or ‘ESG’ qualify as a product which promotes E & S characteristics?

2.      Would a reference to a product taking into account sustainability factors or sustainability risks be treated as falling within Article 8 of the SFDR?

3.      Would a minimum percentage of a portfolio be required to invest in E&S in order to qualify as having E&S characteristics?

Application of Article 9 SFDR- where a financial product has a sustainable investment as its objective

Clarification as to whether a financial product which has a sustainable objective needs to have a minimum investment in sustainable investments, or a maximum limit on investment in non-sustainable investments, to remain within Article 9?

Application of SFDR product rules to MIFID Portfolios and tailored financial products

In respect of portfolios or tailored financial products managed on a discretionary client by client basis, do the SFDR disclosures apply at the portfolio level or can they apply at the level of the standardized portfolio solutions?

In the event that SFDR applies at the portfolio level, how will issues of confidentiality be reconciled, particularly in respect of website disclosures?

SFDR Article 6,8,9,10 disclosures

E&S characteristics and Sustainable investment

Non-financial criterion as a key aspect  of product communication

Sustainable investment objective- Article 9

Significantly binding approaches under DOC 2020-03

Process for Disclosures

Pre-contractual disclosures or website content under Article 6, 8, 9, 10 of SFDR apply independently of the categories defined in the DOC 2020-03

Where the product promotes E&S characteristics (Article 8)  or sustainable investments (Article 9), and in order to present the non-financial criterion as a key aspect of product communication, such disclosure must meet the requirements of DOC 2020-03

With regards to products having a sustainable investment objective (Article 9) this will be implementing ‘significantly binding’ approaches within the meaning of DOC 2020-03. AMF considers that an approach based on ‘significant commitment’ of the managed assets is not sufficient to comply with Article 9.

The sole inclusion of non-financial criterion in the management of investment schemes does not require prior approval from the AMF provided there is no substantial impact on the risk or return of the fund.

The process will be to provide disclosures to investors and update to AMF via the appendix to the product approval process.

Managers may modify their pre-contract disclosures defined by SFDR without AMF approval.