Our team often hear clients say that although they understand environmental, social and governance (ESG) factors are important, they just do not know where to begin.
What is the main framework or regulation for ESG in Europe?
The Sustainable Finance Disclosure Regulation (SFDR) is the principal regulation for financial markets, asset managers and advisors, although there are many others.
Introduced in 2021 by the European Union (EU), its aim is to increase transparency and comparability for investments in order for investors to make informed choices. This regulation also leads to one of the EU’s big objective – attracting private funding to help Europe make the shift to a net-zero economy.
Specifically for funds, the classification system for defining sustainable investment activities has created the following fund types:
- Article 6 fund: fund type does not integrate any sustainability goals nor characteristics into investment
- Article 8 (Light Green) fund: ‘promoting environmental and social characteristics alongside its investment goals’
- Article 9 (Dark Green) funds: ‘products targeting sustainable investments’ with clear sustainability goals/objectives.
Why should asset managers implement an Article 8 or 9 strategy when disclosing under SFDR?
There are a number of good reasons for implementing an Article 8 or 9 strategy, even if at first it may seem like a daunting task.
While demand for sustainability and transparency continues to come from both investors and regulators, aligning a fund to Article 8 or 9 is a great opportunity for asset managers to be seen as leaders on environmental, social and governance matters, differentiating themselves.
Investors are increasingly looking at not only the return they get from an investment, but also the impact an investment has on people and on the planet. It is sometimes referred to as the Triple Bottom Line: People, Planet and Prosperity.
As demand grows from investors, especially those with active stakeholders, Article 8 and 9 funds will be able to demonstrate their alignment with the sustainability agenda in a clear and effective way.
On the regulatory side, being a compliant Article 8 or 9 fund with suitable disclosures demonstrates to market (including investors, regulators and other stakeholders) that an asset / fund managed has made a strategic decision to avoid accusations of greenwashing by following the stringent guidelines set out the regulation requirements and discloses any relevant information linked to the sustainability considerations and risks.
What is JTC’s strategy to assist the Asset Managers for the implementation while being compliant with the regulator?
JTC acts as the Investment Manager (IM) for most of the funds it has under administration.
JTC also ensures the compliance with regulatory requirements including SFDR disclosures and controls on investments.
We help our clients throughout all stages of the fund cycle to get started with ESG, which includes drafting or updating their policies and procedures, ensuring compliance on all aspects with SFDR regulation, including support with reporting requirements and submitting ongoing disclosures.
Our solution is personalised for each fund given the strategy they wish to implement and is agnostic of jurisdiction within the EU.
How does JTC ensure compliance for funds to be defined Article 8 and 9? And what are the processes put in place to ensure this?
Once a fund has been defined as Article 8 or 9 and all proper work has been finalized for the fund, JTC communicates with the regulator and ensures that the fund is compliant when selecting investments within its specific investment strategy.
JTC continually monitors compliance with the latest regulations and market practices on a regular basis to keep its clients updated of the latest changes or new requirements.
Once informed, JTC will create a plan in partnership with fund managers to move forward in the most efficient way.
These questions are only the tip of the iceberg when covering the topic of ESG, in Luxembourg, in Europe and globally.
We always seek to understand more details of our client’s objectives to implement a more sustainable strategy to their fund, across asset classes. It is key to have the in-depth conversation regarding the scope of a fund at the earliest possible opportunity.