The use of environmental, social and governance (ESG) factors has become a vital part of the investment process for most modern asset managers. ESG integration is defined by the UN Principles for Responsible Investment as:
“The explicit and systematic inclusion of environmental, social and governance issues in investment analysis and investment decisions.”
AIM integrates ESG into the investment decision-making process since inception in three steps:
SFDR is a part of the EU’s Financing Sustainable Growth Action Plan and was established to reorientate capital flow towards sustainable finance. SFDR requires asset managers and other financial market participants to provide transparency on sustainability and imposes mandatory ESG disclosure obligations.
For a fund to comply with Article 8:
Transparency of the promotion of environmental or social characteristics in pre‐contractual disclosures requires the following:
“Where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices, the information to be disclosed pursuant to article 6 shall include the following:
1. Information on how those characteristics are met;
2. If an index has been designated as a reference benchmark, information on whether and how this index is consistent with those characteristics.
”Financial market participants shall include in the information to be disclosed pursuant to article 6(1) and (3) an indication of where the methodology used for the calculation of the index referred to in paragraph 1 of this article is to be found.
So, article 8 applies to funds promoting environmental and social objectives and which take more into account than just sustainability risks as required by article 6.However, article 8 funds don’t have ESG objectives or core objectives – as required for becoming labeled an article 9 fund.
For a fund to comply with Article 9:
Transparency of sustainable investments in pre‐contractual disclosures requires the following:
“Where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark, the information to be disclosed pursuant to article 6 shall be accompanied by the following:
1. Information on how the designated index is aligned with that objective;
2. An explanation as to why and how the designated index aligned with that objective differs from a broad market index.
”Compared to article 8 funds, which should promote environmental or social characteristics and have good governance practices, article 9 funds should make a positive impact on society or the environment through sustainable investment and have a non-financial objective at the core of their offering. Both article 8 and article 9 funds will be considered ESG aligned, only that the latter one is for even further forerunners in sustainability, hence the light green and dark green reference.
This disclosure is made in accordance with Article 10 of Regulation (EU) No. 2019/2088, concerning the disclosure of information related to sustainability in the financial services sector.”
