Funds Legal Update | June 2022

We take a look at the latest environmental, social and governance (ESG) developments, plus other updates from the UK and Europe, including new publications on the EU Sustainable Finance Disclosure Regulation (SFDR), a new edition of the UK Regulatory Initiatives Grid, and EU guidance on how to prepare an important section of the key information document (KID) for a PRIIP (packaged retail investment and insurance product).

ESG Developments

ESAs' questions on interpretation of SFDR and Taxonomy Regulation

On 13 May 2022, European Securities and Markets Authority (ESMA) published a document from the Joint Committee of the European Supervisory Authorities (ESAs) listing questions for the European Commission about the interpretation of the EU SFDR and Taxonomy Regulation, which focused on areas including:

• principal adverse impact (PAI) disclosures, including whether a firm is able to consider PAI under Article 7 SFDR for some of the products it manages, whilst not considering PAI at entity level;
• the transparency of the integration of sustainability risks and rules for products that are no longer made available; and
• the scope of Articles 5 and 6 of the Taxonomy Regulation.

On 25 May 2022, ESMA published a Commission decision and annex containing the Commission's answers. Key points on which clarification has been provided include:

• the application of SFDR disclosure requirements to products that pre-dated SFDR and/or were no longer available to new investors at the time SFDR came into force (10 March 2021);
• the application of the Taxonomy Regulation to Article 8 and Article 9 funds; and
• the PAI regime.

ESAs statement clarifying draft RTS under SFDR

On 2 June 2022, the ESAs published a statement intended to clarify their draft regulatory technical standards (RTS) issued under SFDR. The statement refers to the separate draft RTS issued in February 2021 and October 2021, not to the text of the more recently adopted Delegated Regulation containing the provisions from both draft RTS.

The statement contains:

• clarifications on disclosure of PAI of investment decisions on sustainability factors;
• guidance on pre-contractual financial product disclosures;
• guidance on periodic financial product disclosures;
• guidance on taxonomy-related financial product disclosures;
• guidance on "do no significant harm" disclosures; and
• guidance on disclosures for financial products with investment options

The ESAs explain that the statement follows many requests for clarification on the practical implications of the RTS, given the breadth and technical complexity of the rules.

New greenhouse gas accounting and reporting standard for private equity

The Initiative Climate International has published a new standard for accounting and reporting greenhouse gas (GHG) emissions within private equity (PE). The standard gives guidance on calculating the GHG emissions of PE firms and portfolio companies, attributing emissions to general partners and limited partners, and aggregating and reporting emissions at fund level.

The aim is to support a more consistent approach to emissions calculations and disclosures, in that way improving reporting, allowing for better portfolio analysis, and supporting target-setting in connection with net zero commitments.

Other updates

New edition of the Financial Services Regulatory Initiatives Grid

On 25 May 2022, the Financial Services Regulatory Initiatives Forum published the Regulatory Initiatives Grid for May 2022 that sets out details of regulatory initiatives that are relevant to the financial services sector and are planned for the next 24 months. Page four sets out a high-level timeline showing initiatives in the regulatory landscape up to the end of 2023.

For each initiative, the grid provides details of the lead authority, major milestones, indicative impact and likely timetable for developments. Where appropriate, it also specifies where timings have changed since the previous edition, and where a new initiative has been added.

New initiatives in this iteration include:

• HM Treasury review of the UK's overseas framework, including the overseas person exclusion, overseas regulatory perimeter and financial promotion exemptions, ahead of consulting on potential changes (no timing given for publishing the consultation paper); and
• FCA work on broadening the distribution of the long-term asset fund (consultation paper planned for summer 2022).

Upcoming developments with updated timing include:

• On the review of the appointed representatives regime, the FCA Policy Statement is now planned for Q3 2022.
• On the FCA's work around strengthening financial promotions rules for high risk investments, including cryptoassets, a policy statement is now expected in Q3 2022.

ESAs issue statement on product descriptions in PRIIPs KID

On 9 May 2022, the Joint Committee of the ESAs published a joint supervisory statement about the "what is this product?" section of the KID requirements for packaged retail and PRIIPs.

The statement clarifies the ESAs' expectations of this section, which is a largely free-text section in the KID template, and considered an essential part of the document to enable retail investors to understand the key features of a product.

The statement outlines a range of poor practices the ESAs have identified in how PRIIP manufacturers (such as fund managers) describe products in this section, and sets out expectation in each area to ensure information is presented to retail investors in an adequate, clear and accessible manner, helping them understand products' key features.

Key issues addressed include:

• The use of overly broad, general categories when specifying the type of product, and undifferentiated and abstract descriptions for the intended retail investor;
• Poor practices regarding overall clarity of language and layout of the text, including due to automation;
• Insufficient information regarding capital protection levels and potential losses for the investor, and limited information about the nature of the specific underlying assets to which investors are exposed; and
• Imprecise description of early termination features and lack of clarity around the nature and timing of coupon payments.

Russian invasion of Ukraine: ESMA statement for fund managers on obligations to investors

On 16 May 2022, ESMA published a statement for fund managers on their obligations to investors in light of the Russian invasion of Ukraine. The statement aims to promote investor protection and consistency of approach.

It includes high-level guidance on:

• Appropriate action in case of exposures to Russian, Belarusian and Ukrainian assets, given valuation and liquidity uncertainties;
• The process managers should follow when evaluating these assets; and
• Whether managers may consider using liquidity management tools, e.g. side pockets, to segregate these assets.

ESMA expects managers of investment funds with exposures to assets facing liquidity issues to assess whether a fair value of these assets can still be determined, and adapt the valuation without undue delay.

ESMA will continue to monitor the situation, and take or recommend any measures necessary to mitigate the impact of the Russian invasion of Ukraine on investment funds.