ESMA Report on the Integration of Sustainability Risks and Disclosures Under SFDR

The funds industry continues to wait for regulators and legislators to review and fix the multiple flaws in the existing SFDR regime.  In the meantime, in July 2023, ESMA launched a “common supervisory action” ("CSA”) alongside national regulators to assess the integration of sustainability risks and disclosures by fund managers - both UCITS and AIFMD - under the current SFDR regime.  ESMA has now published its final report on this CSA.

ESMA's report contains specific examples of practices it has observed, grading these as “good practice”, “below-average practice” and “non-compliance”, making this relatively short document recommended summer holiday reading for all compliance officers that continue to grapple with SFDR.

However, it is worth flagging one specific example of non-compliance mentioned in the report relating to "good governance" requirements for Article 8 funds: “Managers had insufficient processes for Article 8 SFDR funds to ensure that good governance practices were followed in the companies invested in. Although there was some level of screening for these practices, there were no defined timeframes or materiality thresholds for how long engagement with a non-compliant company could continue before it would be excluded from the investment universe. Article 8 SFDR requires that, independently of whether the fund is investing in sustainable investment or not, investments are made in companies that follow good governance practices.”