On 26 July 2021, the European Commission published its Q&A guidance (Guidance) on the EU Sustainable Finance Disclosure Regulation (SFDR).
In this Law-Now, we provide a practical view on how SFDR disclosure requirements may directly or indirectly apply to Swiss investment fund managers (Swiss Fund Managers).
Direct application of SFDR to Swiss Fund Managers
The SFDR makes a distinction between entity-level disclosures and product-level disclosures:
Entity-level disclosures require publication of certain information on the website of asset managers (and other in-scope financial market participants), including publication of data regarding the principal adverse impact of investment decisions on sustainability factors (i.e. on environmental, social and employee matters, human rights, anti‐corruption and anti‐bribery matters). Alternatively, an opt-out statement must be published based on the "comply or explain" principle. In the Commission's view, if an asset manager adopts the "explain" as opposed to the "comply" mechanism, it must provide clear reasons backing its choice not to consider the adverse impact of its investment decisions on sustainability factors.
Product-level disclosures require that pre-contractual, product-related disclosures be published on websites and apply to financial products (e.g. funds), which either promote, inter alia, environmental or social characteristics or a combination of those characteristics, or that have sustainable investment as their objective.
Prior to the publication of the Guidance, it was generally accepted that product-level SFDR disclosures were applicable to third-country (e.g. Swiss) asset managers marketing funds in the EU under a national private placement regime (NPPR). The Guidance confirms this. By contrast, it was unclear whether entity-level SFDR disclosure requirements were also applicable to third-country asset managers. In this respect, the Guidance provides for no clear-cut exemption, even if foreign funds are exclusively marketed under an NPPR. Based on the Guidance, it rather seems that the Commission views entity-level disclosures as applicable also to third-country asset managers.
Notwithstanding the foregoing, it is important to keep in mind that the application and the ultimate interpretation of the SFDR primarily relies on each individual EU member state and that the NPPR may vary from one jurisdiction to another. Appropriate monitoring of local rules within targeted EU jurisdictions is, thus, key for Swiss Fund Managers. From a risk-management perspective, it may be prudent for Swiss Funds Managers to ensure pro-active compliance with entity-level disclosures to a certain degree by providing high-level information since it remains unclear to what extent local authorities will endorse the Commission's (implied) position.
Indirect application of SFDR to Swiss Fund Managers
The SFDR is also relevant to Swiss Fund Managers who provide portfolio and risk management services as well as non-discretionary investment advice under a delegation by EU AIFMs promoting or labeled as "ESG-compliant".
In such a scenario, Swiss Fund Managers will be required to assist EU AIFMs in complying with their own duties to implement SFDR requirements. Such assistance will be contractually formalised in a separate delegation agreement between the EU AIFM and a Swiss Fund Manager or, more likely, will be included in the investment management agreement resulting in the Swiss Fund Manager being subject to indirect SFDR compliance.
Any such indirect SFDR application will oblige Swiss Fund Managers to become familiar with a number of SFDR requirements, including the integration of sustainability risks in the decision-making process and keeping remuneration consistent with this integration. Potential assistance in periodic SFDR reporting by EU AIFMs will have an additional impact on Swiss Fund Managers' contractual obligations.
The Guidance is not entirely helpful for EU-based financial market participants inasmuch as it does not provide clear-cut and practical interpretation rules for certain SFDR requirements. To some extent, the same is true regarding the application of the SFDR to non-EEA fund managers, typically Swiss Fund Managers. However, the Guidance deserves credit for reminding Swiss Fund Managers they may have to deal with additional obligations under SFDR, whether directly or indirectly. Against this background, Swiss Fund Managers, particularly those offering or managing ESG products, should not overlook the need for proper monitoring of the forthcoming implementation rules, such as the Regulatory Technical Standards (RTS) and potential local practices under NPPR.
For more information on this Guidance and investment regulations in Switzerland, contact your CMS client partner or local CMS experts: