Maples Group | SFDR IMPACT ANALYSIS | 2nd Edition

SFDR IMPACT ANALYSIS

A Comprehensive Review of ESG Integration in Europe

2ND EDITION

ESG

SFDR

SFDR

1 OVERVIEW OF THE MARKET

INTRODUCTION

We are delighted to publish this second edition of our SFDR Impact Analysis. Since the publication of our first edition in 2023, SFDR continues to have a significant impact on the European asset management landscape.

Assets in European sustainability funds now stand at over €5.5 trillion , representing a 19% increase year on year.¹ SFDR is playing a crucial role in meeting the ambitions of the European Union's Green Deal. The increased flow of capital towards sustainable activities is a direct consequence of SFDR, thereby accelerating the transition to a low-carbon, more sustainable economy.

In this second edition of our SFDR Impact Analysis, we have expanded our research to focus on both Irish and Luxembourg domiciled funds. Luxembourg and Ireland are the two largest fund domiciles in the European Union, with an aggregate total of 26,279 active funds. Focusing on both Ireland and Luxembourg enables us to clearly understand the current state of play of sustainable investing, as well as identifying noticeable trends developing in the European sustainable space.

The impact of SFDR remains pronounced in the retail/ UCITS space across both Ireland and Luxembourg. This is principally driven by a combination of investor sentiment, regulatory requirements and traditional distribution channels, all of which we examine in this analysis.

While the number of sustainably focused alternative investment funds remains lower, that number is growing. This is particularly evident in Luxembourg, where there are significant growth trends for renewable energy and energy transition infrastructure funds, which we examine further below.

What we will show in this analysis is that SFDR is working. By mandating asset managers to disclose how they are integrating sustainability risks, impacts, and opportunities, SFDR is proving to be the catalyst behind the significant shift towards the European Union's vision for a greener, more resilient future.

Mind the Gap

Despite the significant success that SFDR has had in reorientating private capital towards sustainable investments, what is clear from our analysis is from a regulatory context, there remains the risk for compliance gaps. Asset managers should not become complacent by the lack of current regulatory intervention. Regulators remain in information gathering mode in an SFDR context, evidenced by the various questionnaires and thematic reviews issued by both the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier ("CSSF"). Even during this time, they have flagged concerns over the quality of the sustainable related disclosures. It is inevitable that European regulators will look to root out bad actors who are making products available with overstated sustainability credentials, through enforcement actions and regulatory sanctions. This will also likely have the impact of establishing the base expectations of what are suitable sustainability related disclosures for European investors.

About this SFDR Impact Analysis

The aim of this SFDR Impact Analysis is to provide asset managers with a practically focused assessment on the current state of sustainable investing in Europe, as well as valuable insights as to how it is likely to evolve in the future. It is also designed to assist asset managers considering establishing a European domiciled fund or marketing a fund in Europe, by identifying how SFDR is impacting such fund launches and providing a guide on navigating SFDR requirements as well as peer analysis on approaches taken to date.

We have focused our analysis on the 19,636 Luxembourg domiciled and 6,643 Irish domiciled

active funds identified in the respective Monterey Insight Fund Report 2023 (“Monterey Report”). These 26,279 domiciled active funds (in aggregate) form the market sample for our statistical analysis. In addition to the Monterey Report, we have also used publicly available SFDR disclosures, and sought to rely on relevant third party ESG data.

Market Leader

The Maples Group is a leading international service provider offering clients a comprehensive range of legal services on the laws of Ireland, Jersey, Luxembourg, the British Virgin Islands and the Cayman Islands, and is an independent provider of fiduciary, fund services, regulatory and compliance, and entity formation and management services.

Our Irish Funds and Investment Management team is independently ranked first among legal service providers in Ireland in terms of total number of funds advised. Similarly, our sizeable and fast-growing Luxembourg team covers the whole range of funds and investment management services. As we have acted on such a volume of funds across the two largest fund domiciles in Europe, our teams have a more rounded exposure to what is happening at the cutting edge of the asset management market which enables us to track all relevant information and statistics on new product trends and innovative fund structuring.

In a sustainable finance and responsible investing context, this provides us with an unparalleled overview of how managers have responded to the introduction of SFDR across Europe and the greater demand for investments with strong sustainability focused credentials.

About Monterey

Monterey Insight is a leading independent fund industry research company that provides the only comprehensive report of service providers for all investment funds serviced in UK, Luxembourg, Ireland, Jersey and Guernsey. The Monterey Report includes only active funds, i.e., it excludes from consideration funds which are in termination, as well as unlaunched/ unseeded funds.

The aim of this SFDR Impact Analysis is to provide asset managers with a practically focused assessment on the current state of sustainable investing in Europe.

SFDR - AT A GLANCE

WHAT IS IT?

SFDR seeks to establish a harmonised approach on sustainability-related disclosures provided to investors domiciled within the EU. Broadly speaking, SFDR imposes sustainability related disclosure and transparency obligations on both the asset manager (i.e., at the entity level) and on the fund which it manages (i.e., at the product level).

WHO IS IN SCOPE?

SFDR applies to asset managers (and investment advisers) domiciled or operating in the EU who are managing or distributing funds to European investors.

DOES IT APPLY TO NON-EU ASSET MANAGERS?

Yes, if those non-EU asset managers are managing EU funds or marketing non-EU funds via national private placement regimes in the EEA, they will be required to comply with SFDR.

WHAT DOES IT REQUIRE?

SFDR requires asset managers to provide more transparency on how they integrate sustainability risks into their investment decisions and the consideration of how principal adverse sustainability impacts into the investment process.

DOES SFDR HAVE CATEGORIES OF SUSTAINABLE PRODUCTS?

Yes, SFDR identifies three types of funds and distinguishes between them depending on the extent of environmental, social and governance ("ESG") integration. The three types being colloquially known as an Article 6 fund, an Article 8 fund and an Article 9 fund.

WHAT IS AN ARTICLE 6 FUND?

A fund that either does or does not integrate the consideration of sustainability risks into its investment decision making process.

WHAT IS AN ARTICLE 8 FUND?

A fund that promotes environmental or social characteristics, investing in companies which follow good governance practices.

WHAT IS AN ARTICLE 9 FUND?

A fund that has a sustainable investment objective.

WHAT IS A SUSTAINABLE INVESTMENT UNDER SFDR?

It is an investment that contributes towards an environmental or social objective chosen for, or characteristics promoted by, your fund, provided that (i) the activities of that investment do no significant harm ("DNSH") to such environmental or social objectives / characteristics; and (ii) that investment follows good governance practices.

Determining what is deemed a sustainable investment is subjective; asset managers are afforded absolute discretion in designing their own framework to assess if an investment qualifies as sustainable.

WHAT ARE THE MIFID SUSTAINABILITY PREFERENCES?

EU based distributors must assess an investment's suitability for retail investors. Within that assessment is a requirement to establish that investor's sustainability preferences. Distributors can only make investment recommendations based on alignment with that investor's sustainability preferences.

HOW DO YOU SATISFY THE MIFID SUSTAINABILITY PREFERENCE?

In order to ensure a fund meets a retail investor’s sustainability preferences, that fund must do at least one of the following: (i) commit to a minimum holding of sustainable investments; (ii) commit to a minimum holding of Taxonomy-aligned investments; or (iii) consider PAI of their investment decisions on sustainability factors, at the product/fund level.

WHAT IS GREENWASHING?

A practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product or a financial service.

WHAT IS CSRD?

The Corporate Sustainability Reporting Directive (CSRD) amends existing European accounting legislation to enhance the rules concerning the social and environmental information that companies have to report. It increases both the number of companies subject to sustainability reporting rules and the level of detail that must be included in such reporting.

WHAT DOES TAXONOMY-ALIGNED MEAN?

The Taxonomy Regulation establishes a framework to classify environmentally sustainable economic activities (otherwise known as Taxonomy-aligned) by setting harmonised criteria for determining whether an economic activity qualifies as environmentally sustainable.

WHAT ARE PRINCIPAL ADVERSE IMPACTS?

Principal adverse impacts ("PAIs") and sustainability risks are interrelated though different concepts. The concept of PAI intends to capture the impact of investment decisions that results in negative effects on sustainability factors.

WHERE DO I MAKE THE SUSTAINABILITY RELATED DISCLOSURES?

Asset managers managing or distributing Article 8 or Article 9 funds must make sustainability related disclosures in its (i) fund prospectus; (ii) website; and (iii) periodic reports.

OUR SUSTAINABLE INVESTING GROUP

The Maples Group is fully committed to the goals and initiatives of sustainability. We are highly focused on the impact that ESG and responsible investment will have on the financial services sector.

Our Sustainable Investing Group is a dedicated, multi-disciplinary team of ESG and sustainable finance experts drawn from our Funds & Investment Management, Finance, Banking, Corporate, Real Estate and Dispute Resolution teams. Our global footprint ensures that we have exposure to sustainable investing trends and developments. It also enables us to draw on the experiences and expertise of the entire Maples Group, to develop a uniform and consistent approach to ESG initiatives for our global clients.

Our Sustainable Investing Group continually engages with governments, regulators and industry associations, in many of the jurisdictions in which we operate, to help shape the financial services industry’s response to developments in ESG and sustainable finance regulation.

Sustainable Investing in Europe

At a European level, our sustainability team is highly focused on the impact of the EU’s Sustainable Finance Action Plan for the European asset management sector, in particular, the impact of SFDR, the Taxonomy Regulation and CSRD.

Having a multi-jurisdictional European footprint allows our sustainability specialists to quickly evaluate how an EU regulatory requirement is being treated under both Irish and Luxembourg law, as well as compare and contrast positions taken by the CSSF and the Central Bank of Ireland on a specific SFDR or sustainable finance issue. We are also able to draw on the experiences and expertise of the entire Maples Group, including our ESG award winning colleagues in funds and fiduciary services, to develop and deliver ESG solutions for our global clients.

How We Can Help

We have collaborated with leading global asset managers and institutional investors operating in the EU to develop end-to-end SFDR compliance solutions at both the operational level within the asset manager and at the underlying fund / financial product level.

We can audit policies and procedures to identify those affected by SFDR, and best advise how those policies can be enhanced to integrate the consideration of sustainability risks into the investment decision-making process and overall risk framework.

At the underlying fund / financial product level, we can assist with SFDR financial product analysis, including undertaking a full review of all offering documents and marketing collateral to assist with the determination of SFDR product categorisations, as well as helping prepare Article 8 and Article 9 pre-contractual, website and periodic disclosures.

The Maples Group also offers a range of other ESG solutions to support our clients including ESG data and reporting, fund and manager ESG certification and the Maples Sustainability Platform which is designed to support the operational and compliance requirements of SFDR compliant Article 8 or 9 funds. For further details see below in the section entitled Gateway to Europe - Maples Sustainability Platform

2 FOCUS ON PRODUCT

ESG INTEGRATION IN EUROPE

Europe is at the forefront of sustainable investment globally with assets in sustainability focused funds now exceeding €5 trillion. We are only in the second full year of SFDR implementation and its impact on the European funds space has been immense.

Market Overview

As part of our analysis, we examined over 26,000 funds across Luxembourg and Ireland and found that over 28% are sustainability focused (i.e., are categorised as ether Article 8 or Article 9 under SFDR).

NUMBER OF FUNDS

While the Article 6 category (the default for any investment fund) remains the most common classification, as we examine below, this may not be the case for long.

It is also worth remembering that an Article 6 categorisation does not necessarily mean no ESG integration. Despite being categorised as an Article 6 fund, many managers still integrate ESG factors into their investment decision making process for their Article 6 funds. EU regulated managers are also

now legally required to consider sustainability risks alongside other traditional factors as part of the overall investment decision making process for all fund types.

The existing SFDR framework provides little by way of distinction between the Article 6, Article 8 and Article 9 categorisations. Nor does it apply any minimum sustainability criteria or thresholds for what constitutes an Article 8 fund. As a result, the Article 8 category has become quite a broad church. We have seen plenty of what could be described as strong Article 6 funds demonstrating more ESG credentials than a weak Article 8 fund. Introducing minimum sustainability criteria would address this. We explore this further in Chapter 4 - Key Developments in Sustainable Investing

ESG Integration is not slowing down

Ireland and Luxembourg are the two largest fund domiciles in Europe. Interestingly, when we look to Ireland and Luxembourg individually, the proportion of Article 8 and 9 funds is remarkably similar in both jurisdictions, demonstrating that asset managers and investors across Europe are embracing SFDR.

There is a similar alignment in terms of year-on-year AUM growth figures also, making it clear that the strong uptake of sustainable funds has continued apace post full implementation of SFDR in January 2023.

This level of integration and AUM growth is all the more remarkable against the broader market backdrop in 2023 when many managers found fundraising challenging.

The number of Article 8 and 9 funds have increased by more than 20% year on year. This growth is equally pronounced when we look at Article 8 and 9 funds by reference to asset value, with 39% of Luxembourg and Irish combined AUM (approx. €4 trillion) now being managed within the Article 8 and 9 framework.

This growth trend is even more pronounced when you look at new fund launches. In 2023, 51%2 of all new funds launched in Europe were categorised as either Article 8 or Article 9 and this trend has continued into 2024. At this rate of growth, we expect that Article 8 and 9 funds will likely represent more than half of the European fund universe in the near future.

Broad range of assets classes

As notable as the growth in both the number and AUM of sustainable funds, is the diverse range of asset classes across which managers are delivering sustainable investment strategies. Asset managers are structuring sustainable funds across all asset classes demonstrating that the Article 8 and Article 9 categorisations are not constraining managers in terms of investment portfolio construction.

This variety of asset classes reinforces that SFDR is achieving one of its key objectives, namely the redeployment of capital sustainably across a broad spectrum of asset and fund types which will be a key step in achieving the net zero goals of the European Green Deal.

OF NEW FUNDS IN 2023 WERE ARTICLE 8 OR ARTICLE 9

ANALYSIS OF ARTICLE 8 FUNDS

Article 8 funds are growing rapidly, both in number and AUM size. Article 8 funds account for 36% of all assets held in Luxembourg and Irish domiciled funds. This growth rate can be attributed to the flexibility that an Article 8 fund offers in terms of product design and portfolio construction.

What are Article 8 Funds investing in?

The flexibility of the Article 8 fund is demonstrated by the asset allocation it supports. Equity focused strategies dominate, representing over 37% of all Article 8 funds, followed by debt focused, mixed strategies and ETFs. These allocations are not surprising given these are the predominant strategies in European funds.

Sustainable ETFs

Ireland is the domicile of choice for European domiciled ETFs, home to over 70% of all European domiciled ETFs. European ETFs are established as UCITS. ETFs are traditionally index tracking products and are favoured by individual investors for several reasons. They are cost-effective, provide a diversified investment portfolio and offer transparency which is particularly advantageous when navigating various markets and asset classes including those focused on sustainability.

The ETF sector has embraced SFDR. Over 32% of ETFs in our sample are categorised as Article 8 funds which is above the average for the broader fund sector.

The inherent design of ETFs (to replicate index performance) naturally aligns with the criteria for Article 8 classification. This is because ETF managers depend on the composition of the indices their funds track which provides a level of predictability regarding the assets included in the fund. This reliance simplifies the task of portfolio oversight, a process that can be particularly data-intensive in the case of actively managed funds.

ETFS ARE

Article 8 – the people's choice

Over 80% of Article 8 funds are established as retail products under the UCITS regime. This has been driven by both genuine investor preference for sustainability focused products as well as the traditional UCITS distribution channels demanding them.

EU based distributors are required to evaluate the suitability of a fund for a retail investor before offering it for sale. This evaluation includes determining the sustainability preferences of the investor as part of the investment process. Distributors and platform arrangers will then have to make investment recommendations based on these sustainability preferences.

As a direct result of these requirements, distributors and platform arrangers are now seeking more sustainability focused funds from product manufacturers. We explore the impact of these sustainability preferences below.

Sustainability Preferences Still Impacting Product Design

Possibly the least surprising finding in this analysis is the impact the MiFID sustainability preferences has on Article 8 product design in both Ireland and Luxembourg.

As we established in our first edition, asset managers of Irish domiciled Article 8 funds were ensuring compliance with the MiFID sustainability preferences, near unanimously (91%), by considering the PAI of their investment decisions on sustainability factors at the Article 8 product / fund level.

The position has played out identically in Luxembourg. In aggregate, across both Ireland and Luxembourg, 92% are choosing to satisfy the consideration of PAIs at fund level to meet the MiFID sustainability preferences. As we noted previously, this is clearly understandable. To fulfil the criteria for the sustainability preference assessment, only one limb needs to be satisfied. The consideration of PAI at fund level is entirely within the control of each asset manager and this means they are not dependant on third party data providers to confirm a commitment to either sustainable investments or taxonomy alignment.

ARTICLE 8 FUNDS & MIFID SUITABILITY PREFERENCES

Commitment to holding taxonomy aligned investments remains significantly low at 2%. Although CSRD (as we discuss in Chapter 4 - Key Developments in Sustainable Investing) may increase this in the longer term, ascertaining whether an investment is Taxonomy aligned is still quite challenging for managers due to the lack of available, reliable and / or verifiable data.

What's in a name? ESMA Guidelines on Fund Names

Article 8 funds commitment to holding sustainable investments will take on additional importance in the context of the ESMA guidelines on fund names using ESG or sustainability terms³.

Initially ESMA took the position that to use such terms funds must have a minimum commitment of 80% of its portfolio in investments promoting environmental and / or social characteristics, out of which 50% should consist of sustainable investments.

They then replaced this 50% threshold with a requirement for a "meaningful" investment in sustainable investments. ESMA have not offered a view as to what "meaningful" entails, but given the initial position of 50%, we can reasonably assume it won't be significantly below this.

When we look at the sustainable investment figures from our analysis below, what we can say with certainty is that over 40% of Article 8 funds would be precluded from use of these names, and it's likely that the portion of Article 8 funds that would be eligible to use them would be less than 20%.

ARTICLE 8 COMMITMENTS TO SUSTAINABLE INVESTMENTS

The final guidelines will apply to all new funds three months after publication with existing funds being given nine months from publication to comply. In the interim, asset managers should have regard to these proposals when contemplating the naming of their Article 8 funds.

³ESMA proposes changes and updates timeline for its Guidelines on funds’ names

ANALYSIS OF ARTICLE 9 FUNDS

While year on year the number of Article 9 funds has been relatively static, our analysis suggests this will increase in the near future.

Growth on the Horizon?

Only 3% of Irish and Luxembourg funds are currently categorised as Article 9. This figure is consistent with the findings in our first edition. This current figure is likely a legacy of the European Commission stating in July 2021, its expectation that the portfolio of an Article 9 fund should consist almost exclusively of sustainable investments.

This high bar had historically put asset managers off the Article 9 fund categorisation, with some managers preferring to classify their sustainability focused products (with significant exposures to sustainable investments), as Article 8 funds. As touched on above, a commitment to sustainable investments often depends on data from external sources. Consequently, making significant commitment to these investments, which is essential for qualifying as an Article 9 fund, can present considerable challenges.

However, when we look to the number of funds launched in just the last year, the portion of Article 9 funds is over 7% which is indicative that their market share will increase markedly in the near future.

OF NEW FUNDS ARE ARTICLE 9

This increase is likely driven by the European Commission subsequently reaffirming in 2023 that managers have autonomy in how and what they classify as a sustainable investment and also perhaps an increased confidence in data flows supporting these classifications.

This is a growth trend we envisage continuing as CSRD will increase both the number of companies reporting from a sustainability perspective (by increasing the scope of reporting obligations across new entity types) and increase the quality of such reporting (by prescribing new and more detailed requirements). The enhanced sustainable reporting framework under CSRD, coupled with maturing data flows within the sustainable value chain, should alleviate prevailing data challenge concerns, allowing asset managers to increase commitments to both sustainable investments and Taxonomy-alignment with greater confidence in the future.

What are Article 9s investing in?

Article 9 and Private Assets

An interesting trend is the prevalence of private asset funds categorised as Article 9. 22% of the Article 9 funds within our sample are private asset funds, more than twice the number of private asset funds that are categorised as Article 8 (which is less than 10%).

This is particularly pronounced in Luxembourg, where special limited partnerships have proven to be the structure of choice for private fund initiators and their investors, particularly due to the speed to market and the structuring flexibility they offer. To the extent a special limited partnership qualifies as an AIF and falls within the scope of the AIFMD, it will be indirectly regulated at the level of its AIFM. This has resulted in a significantly streamlined fund setup process. The special limited partnership has proven to a very popular product which is illustrated by the fact that in the last two years over 4,000 of these partnerships have been established.

So why are there so many Article 9 funds in the private fund space?

An Article 9 fund must consist of all or substantially all of sustainable investments. The challenge for asset managers is in verifying that the underlying businesses (which these investments reference) meet the criteria for a sustainable investment and satisfy the do no significant harm test. Sourcing and/or relying on third party ESG data vendors to assist in undertaking this determination remains prevalent. In the public fund space, there is little resembling consensus. The views of the ESG data vendors can vary significantly which has naturally led asset managers to take a cautious approach.

Asset managers operating within the private fund space typically have direct control over the businesses and assets they invest in, as opposed to merely possessing an ownership stake. This control grants them a unique perspective and visibility over the assets/underlying businesses, enabling them to pledge to sustainable investment practices in ways that might be unattainable for managers of other types of funds. The deep engagement in the management and oversight of these assets makes diverse strategies in private credit, infrastructure and green energy ideally suited to the Article 9 framework.

Additionally, the private fund space is at the forefront of accelerating the transition to a net zero economy, investing in the expansion of clean energy / renewables and transforming companies operating in carbonintensive sectors to more sustainable models.

OF ARTICLE 9s ARE PRIVATE ASSET FUNDS

3 FOCUS ON ASSET MANAGERS

SFDR – MANCO OBLIGATIONS

SFDR imposes sustainability related disclosure and transparency obligations at both the entity level and at the fund level. Asset managers managing EU funds or distributing non-EU funds in Europe are responsible for compliance with both the entity level and fund level requirements.

SFDR entity level and fund level compliance sits with the asset manager of the relevant fund, (e.g., UCITS management company, AIFM or investment manager ("ManCo")). Broadly speaking, the entity level requirements apply to the ManCo itself, how it has integrated sustainability into its operational and organisational framework, with the fund level requirements applying to the funds under its management.

Understandably, the greater attention of SFDR compliance has tended to focus on the fund level disclosures, (i.e. the pre-contractual templates and the periodic reports, etc). Increasingly however, the supervisory focus of European NCAs has been on how ManCos are complying with the operational obligations imposed by SFDR and supporting legislation.

Policies, Procedures and Resources

SFDR compliance is not just about disclosure. It is increasingly impacting at the operational level.

ManCos are required to ensure that their overall policy and procedures frameworks (i) integrate sustainability risks in the management of all funds; (ii) include conflicts of interest procedures which consider conflicts that may arise as a result of the integration of sustainability risks; (iii) take into account sustainability risks (and, if relevant, take into account the principal adverse impacts of investment decisions on sustainability factors) as part of the due diligence in the selection and ongoing monitoring of investments; (iv) capture details of

procedures to manage sustainability risks in the risk management policy and (v) integrate the consideration of sustainability risks into their remuneration policies. In addition to this enhanced policy and procedural framework, SFDR also obligates ManCos to retain the necessary resources and expertise for the effective integration of sustainability risks, (i.e., dedicated members of staff). It then falls on the board / senior management of each ManCo to ensure that those people are retained and that the integration of sustainability at the operational and organisational framework occurs.

This can be challenging for ManCos to demonstrate, particularly where they have placed a significant reliance on delegate investment managers for compliance with some of these SFDR obligations. While this approach is understandable given the inherent link between SFDR requirements and the day-to-day management of a given fund, it is crucial for ManCos and their boards to design and consistently apply a SFDR compliance model which is appropriate given the nature, scale and complexity of their business as well as one which is adequately contracted and documented.

As we examine in respect of both websites and periodic reporting below, there are areas of heightened SFDR compliance risk that European NCAs are already focusing on. Having documented policy and procedural frameworks, coupled with adequate and frequent reporting, is essential in demonstrating that appropriate oversight is in place.

WEBSITE DISCLOSURES

SFDR website obligations require both entity level and product level disclosures. It is important that ManCos have controls in place from both a compliance and operational perspective to ensure that all website disclosures adhere to both the SFDR content and location rules.

Prominent and Easily Accessible?

As part of our analysis, we examined the SFDR website disclosures of the top 25 management companies by AUM operating in both Ireland and Luxembourg and who collectively manage over half of all AUM across both jurisdictions.

SFDR requires that the website sustainability disclosures be "...clear, succinct and understandable to investors published in a prominent easily accessible area of the website". SFDR further mandates that Article 8 and Article 9 fund specific disclosures be housed in a separate section of the website entitled "Sustainabilityrelated Disclosures" which should be located in the same part of the website where other fund specific information is housed.

What we have found is that there is a high degree of compliance with providing the mandated SFDR website disclosures. However, there remains areas that could be improved.

For example, while many websites contain the required SFDR website disclosure, it can often be challenging to locate and is frequently not displayed prominently compared to other sustainable information.

Refresh this Page (or else!)

Another important aspect is the requirement that SFDR website disclosures be kept up to date. SFDR implicitly recognises the interplay between the Article 8 and Article 9 pre-contractual disclosures (which may become dated over time) and the website disclosure which should remain contemporary. This interplay is established within the Article 8 and Article 9 fund precontractual templates by the requirement to include a hyperlink to where more specific product information may be found.

As was the case last year, we again found instances of hyperlinks that were either non-functional or did not lead to the intended information.

This of course can be easily assessed by NCAs. In addition to being a basic failure to meet the requirements of SFDR to provide up to date information, inoperative hyperlinks demonstrate a lack of oversight by the ManCo.

The point has already been specifically flagged by European NCAs in thematic reviews to date. As such, ManCos should review their processes around SFDR website disclosures and ensure these are documented to avoid regulatory scrutiny and sanction.

Be careful what you say

It is now commonplace for asset managers to have sections of their website dedicated to sustainability. This is understandable as asset managers wish to highlight their sustainability credentials as part of an overall marketing approach in a bespoke way.

While this is laudable and well intentioned in terms of providing additional detail and colour to investors, asset managers must be mindful of the rules around marketing communications⁴ which in practice apply to the majority of such information. In a sustainability context, these marketing rules explicitly require that a link to the SFDR mandated website disclosure be included.

As an overriding requirement, ManCos must ensure any general sustainability information published in respect of the products' sustainability credentials are consistent with the corresponding SFDR disclosures (relating to those products), and that all sustainability disclosures appearing on their websites are clear, fair and not misleading.

Greenwashing (which we examine below) is not restricted to an analysis of the sustainability related disclosures made in a fund's prospectus or regulatory documents.

An asset manager may be deemed to be greenwashing via the provision of these non-SFDR website disclosures if these disclosures are deemed to be overstating their sustainability credentials.

Asset managers should have processes in place to continually review their sustainability related website disclosures to ensure such text is prepared and published in a manner consistent with their SFDR regulatory disclosures and requirements.

EMIR - a cautionary tale for SFDR

European NCAs remain in information gathering mode and are establishing baselines as to suitable and appropriate SFDR disclosure and compliance models. It will take time before the SFDR supervisory framework takes shape.However, asset managers should not take this as an indication that compliance was addressed when they filed their pre-contractual documents in late 2022 and merely take a watching brief.

The regulatory supervisory approach to the European Market Infrastructure Regulation (EMIR) is instructive on how European NCAs are likely to approach SFDR compliance.

EMIR was introduced in 2012 (also on a phased basis) and imposed ongoing reporting obligations on asset managers with respect to the derivative trading activities of their funds under management. Asset managers designed EMIR compliance frameworks largely reliant on a delegation model. Sound familiar yet?

Between 2012 – 2015, European NCAs engaged in an information gathering phase to ascertain how industry was adhering to its EMIR reporting obligations. By 2016, European NCAs set out their baseline expectations to EMIR compliance and were voicing their concerns over the prevailing delegation model, warning industry that the regulatory buck stopped with the asset manager and for them not to assume their delegate was properly discharging their EMIR obligations. Unfortunately, these warning shots were not heeded (in all cases), and what followed has been a series of EU-wide regulatory enforcement actions, sanctions and fines for asset managers resulting from EMIR non-compliance.

EMIR is the cautionary tale for SFDR. European NCAs no more than industry, have been challenged by the pace of SFDR's implementation and the new concepts it introduced to the regulatory supervisory framework. What is clear is that European NCAs are working in lockstep with regards to SFDR compliance. And once they have established their baseline expectations as to what represents appropriate SFDR disclosure and compliance models, this will be articulated to industry. It will then be down to asset managers and their boards to implement and adhere to those expectations. Failure to do so will undoubtedly result in regulatory enforcement actions and fines for bad actors.

The average fine levied to date by European NCAs for EMIR non-compliance has been approx. €150,000. These fines were largely for lack of oversight and/or failure to meet ongoing reporting obligations. In most cases, investors were not impacted or did not suffer a loss. The same will not be the case for SFDR. Compliance failures under SFDR create the very real risk of greenwashing and direct adverse outcomes for investors so regulatory fines will in all likelihood be significantly higher.

So how can asset managers ensure they are meeting all of their SFDR obligations?

Well simply put, they should be assessing their contractual arrangements, as well as stress testing their policy and procedural frameworks to ensure there aren't any SFDR compliance gaps. It's too late to do so when an issue emerges, particularly with the specter of a regulatory action looming.

PERIODIC REPORTING

Alongside pre-contractual and website disclosure, periodic reporting is the third pillar of SFDR compliance. Many Article 8 and 9 funds will now have completed their second SFDR reporting period.

Broadly speaking, the SFDR periodic reporting template follows the pre-contractual one, so when completing, ManCos are effectively revisiting those pre-contractual statements and describing how the fund performed in respect of each one during the relevant period.

Who is Reporting?

Fundamentally the obligation to publish the financial statements of a fund sits with the fund itself, or its GP.

As noted above, the responsibility for SFDR compliance (which includes reporting requirements) sits with the ManCo. This creates an interesting compliance dynamic and requires ManCos and fund boards / GPs to work together in approving and publishing these.

We are increasingly seeing Fund boards and GPs seeking comfort in respect of the SFDR reporting methodologies and the quantitative approaches being employed by ManCos, as this detail will form part of the financial statements they are taking responsibility for.

This is principally driven by the fact that while the qualitative data in SFDR periodic reporting is effectively a continuation of the pre-contractual disclosure (which the fund / GP would have approved and have oversight of), typically fund boards / GPs won't have such oversight of the quantitative aspects..

Consistently Unique

A consistent theme in how ManCos have been approaching SFDR periodic reporting to date is the wide and varied range of disclosure approaches taken. Two examples of this are in respect of reporting on sustainability indicators and fund level PAI consideration.

Sustainability indicators are the metrics by which promotion of environmental and / or social characteristics for a particular fund are measured. Such indicators can be (and typically are) unique to each asset manager and so vary greatly. The sustainability indicators that we have seen most commonly used include the application of exclusion policies to the portfolio, investment rating models (e.g., "ESG scores") and assessment by reference to external benchmarks and/or ESG standards.

Our analysis found a wide variety of such indicators reported on, both proprietary to the relevant asset managers, and operating by reference to third party or external benchmarks or ESG standards. Because of this wide spectrum, performance reporting is similarly varied, and it can be difficult to compare the performance of different funds given entirely different quantitative scoring models.

Where comparison is certainly achievable however is in the context of the allocation percentages. This section mirrors the format of the pre-contractual disclosure and so provides investors with a clear comparison against other funds allocations.

Interestingly, the European NCAs in thematic reviews have asked that where actual allocations reported differed from committed amounts by more than 5%, an explanation be provided as to why this was the case. This is instructive of NCAs expecting ManCos to consider and address any discrepancies should they arise.

The CSSF has also established an annual reporting requirement (separate to submission of the fund financials themselves) in respect of such reporting data. It is clear that is an area that European NCAs will continue to focus on.

Increasing Investor Focus

As the SFDR reporting track record of sustainable funds increases across Europe, investors and other market participants will place more and more reliance on this reporting as a due diligence and fund selection tool.

The periodic reporting template includes a number of questions which contemplate a year-on-year comparison whereby managers must compare how the fund performed as against the previous reporting period.

This will progressively enrich investors insights into funds actual allocations and performance and which will have an increasingly beneficial effect for investors over time.

SFDR - IMPACT ON EEA FUND DISTRIBUTION

Non-EU asset managers looking to successfully fund raise in Europe cannot ignore SFDR and will need to be familiar with how European fund distribution has been impacted by it.

SFDR Applies to Non-EU Managers

SFDR applies to asset managers (and investment advisers) domiciled or operating in the EU, who are managing or distributing funds to European investors. Non-EEA managers either managing EU funds or actively marketing their products via national private placement regimes in the EU will be subject to SFDR.

Additionally, EEA-domiciled funds managed by non-EU managers are also in scope of SFDR even if those funds are not marketed through national private placement regimes in or towards EEA domiciled investors. For example, a US domiciled investment adviser marketing a Cayman Islands fund into Europe is in scope of SFDR at both the entity level and the fund level. Adherence to the entity level obligations might potentially prompt changes (from an operational and procedural perspective) for such non-EU managers.

Successfully Navigating European Distribution

Our Global Registration Services team (“GRS”) supports and assists managers navigate the complexity of requirements associated with distributing their fund products in a multi-jurisdictional environment. We provide support throughout the distribution chain to include market intelligence, market entry of sustainability focused funds within Europe, as well as the maintenance of ongoing reporting and filing obligations for those funds which have successfully registered in Europe.

For further details of our GRS offering please see our Guides to Marketing Funds in Europe

Gateway to Europe – Maples Group Sustainability Platform

In addition to our dedicated GRS team, the Maples Group has established the Maples Sustainability Platform, specifically structured to host ESG and sustainabilityfocused funds (the "Sustainability Platform"). This offers a turnkey solution for clients looking to launch a segregated SFDR-compliant Article 8 or Article 9 sub-fund, allowing them to take advantage of the high demand for ESG focused funds in Europe. EU and non-EU clients looking for a flexible solution for SFDR compliance and European distribution can take advantage of an established fund platform with regulatory approval and legal agreements already in place.

The Sustainability Platform affords clients access to industry leading ESG practices and service providers for Sustainability advisory, fund management, fund distribution, operational and reporting solutions. This includes exclusive access to a first-of-its-kind solution for independent certification of a fund's and manager's ESG strategies.

For further details please see our Sustainability Platform

4 SFDR, WHERE NEXT FROM HERE?

KEY DEVELOPMENTS IN SUSTAINABLE INVESTING

SFDR was implemented as a disclosure regime. While in its relative infancy, SFDR's ongoing evolution suggests it is a labelling regime and arguably SFDR's likely future state is potentially a product regulation.

SFDR 2.0 - A Labelling Regime?

In September 2023, the European Commission launched a public and targeted consultation on the implementation of SFDR. The European Commission sought to assess the SFDR framework (identifying any potential shortcomings) while also focusing on the usability of the regulation and its ability to play its part in tackling greenwashing.

The European Commission acknowledged that SFDR is already operating as a de facto product labelling regime and rather than seeking to re-focus SFDR as a disclosure regulation, it proposed two possible approaches for repurposing SFDR 2.0 as a product regime.

The first approach put forward is to "build on and develop the distinction between Articles 8 and 9" and the existing concepts embedded in them complemented by additional minimum sustainability criteria that more clearly define the products falling within the scope of each Article. The second approach is to establish a new product categorisation system based on the product's investment strategy, with the consultation proposing four new sustainability product categories.

Looking at the two approaches proposed, the European Commission should recognise that the best course of action is to build on and develop the existing SFDR framework. Even at this early stage, all signs suggest SFDR is working, that it is contributing towards the objectives of the European Green Deal and re-orientating private capital towards the transition to a climateneutral, green and inclusive European economy.

It would be a step backwards to rip it up and start again. The concept of an Article 6 fund, an Article 8 fund and an Article 9 fund have all now entered into the asset management lexicon. These categories should not be permitted to disappear from the regulatory framework. The European Commission should build

on the distinctions between the three categorisations. Introducing minimum sustainability criteria will be key, not only from distinguishing between Article 8 and Article 9 funds, but also between Article 6 and 8 funds.

SFDR currently does not apply any minimum sustainability criteria or thresholds for what constitutes an Article 8 fund. Establishing a baseline of what constitutes an Article 8 fund would also provide investors more certainty about its ESG credentials while also affording them the reassurance to compare Article 8 funds with greater certainty.

Updates to SFDR Templates

In December 2023, the European Supervisory Authorities published proposed amendments to the SFDR regulatory technical standards which most notably proposes to refresh the layout for the Article 8 fund and Article 9 fund pre-contractual and periodic disclosure templates. The proposed new templates will include a dashboard on the cover page detailing all key information about the Article 8 fund or Article 9 fund, as applicable, such as commitments to sustainable investments and taxonomy-aligned investments. The proposed amendments to the SFDR Article 8 fund and Article 9 fund pre-contractual and periodic disclosure templates will apply independently of any changes that may result from the SFDR 2.0 consultation.

ESMA Greenwashing Report

ESMA is due to publish its final report on greenwashing shortly which will outline ESMA’s final recommendations including possible changes to the EU regulatory framework.

ESMA has already communicated via an interim update its understanding of greenwashing as "a practice where sustainability-related statements, declarations, actions,

or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product or financial service".

This is a notably broad interpretation and ESMA is further of the view that greenwashing will occur even where a practice may be misleading to consumers, investors, or other market participants.

Asset managers should evaluate their current sustainability claims and promotional materials based on the report's practical examples and content. Undoubtedly mitigating greenwashing risks is a key supervisory and investor-driven focus and the risks highlighted in the report serve as a further important reminder that good governance policies and practices continue to be fundamental to mitigate the risk of greenwashing.

CSRD

CSRD creates a new requirement for companies to report on the sustainability of their activities. It is expected that around 50,000 companies in the EU will be required to publish data under CSRD.

CSRD will apply on a phased basis and only listed European companies with more than 500 employees will need to make the sustainability disclosures in their 2024 financial statements. From 2025, it applies to large European companies (those that meet two of the following criteria: (i) a EUR 25 million balance sheet, (ii) EUR 50 million turnover; or (iii) an average of 250 employees). By 2026 all European listed small and medium-sized enterprises, as well as certain non-EU companies (with significant EU operations) will have to comply.

While many asset managers will not be caught in the first phase of CSRD, it is imperative that as critical adoption milestones approach, asset managers assess whether, and if so when, they will be required to report under CSRD and start preparing now for compliance.

ABOUT THE AUTHORS

IAN CONLON

Ian is a partner of Maples and Calder's Funds & Investment Management team in the Maples Group's Dublin office. Ian is recognised as a leading lawyer in the ESG and sustainable finance space and is head of the Maples Group Irish Sustainable Investing Group. He regularly advises clients on the establishment of sustainability focused investment funds, as well as global asset managers looking to integrate ESG as part of their organisational and operational frameworks. Ian is a regular contributor and speaker at industry conferences and events on ESG and sustainable finance, as well as the broader Irish and European regulatory space. Ian is recommended by Chambers Global, ILFR and Legal 500. Clients describe Ian as "exceptional, he has incredible knowledge of the ESG and sustainable investment space ".

NIAMH O'SHEA

Niamh is a partner of Maples and Calder's Funds & Investment Management team in the Maples Group's Dublin office. Niamh has particular expertise in the ESG and sustainable investment space. She regularly advises asset managers on the implementation and compliance with SFDR, the Taxonomy Regulation and CSRD. Niamh is a frequent speaker at industry events where she shares her insights on ESG matters.

RICHARD O'DONOGHUE

Richard is of counsel in Maples and Calder's Funds & Investment Management team in the Maples Group's Dublin office. He advises in respect of the establishment, authorisation and on-going operation of Irish regulated investment funds Richard has extensive experience on the implementation of and ongoing compliance with SFDR, the Taxonomy Regulation and CSRD. He has a particular focus on SFDR pre-contractual and periodic reporting requirements and frequently contributes to and authors sustainable finance publications.

MICHELLE BARRY

Michelle is a partner of Maples and Calder's Funds & Investment Management team in the Maples Group's Luxembourg office. Michelle has an in-depth understanding of the ESG disclosure obligations and regulatory requirements affecting the investment fund industry and provides asset managers with advice and practical support as they seek to implement the SFDR and Taxonomy Regulation. Michelle has also co-authored the Luxembourg chapter of ICLG Environmental, Social, & Governance Law 2nd Edition and 3rd Edition.

VITTORIA TARAKDJIAN

Vittoria is an associate of Maples and Calder's Funds & Investment Management team in the Maples Group's Luxembourg office. With a burgeoning expertise in the area of ESG, Vittoria regularly advises asset managers on SFDR and the Taxonomy Regulation. She also regularly contributes to ESG initiatives.

ACKNOWLEDGEMENTS

We would like to thank and acknowledge the various contributors for their time and valued input in producing this SFDR Impact Analysis. In particular, Lucy Dempsey, Áine Hannon and Noor Choudhry of the Maples Group.