New French rules impacting the marketing of ESG

Update
The French regulator has updated its position. Please find the updated note from July 2020 here.

As life returns to a timid and pale reflection of the pre-COVID world, we thought that we should highlight some rules published by the French regulator in mid-March.

In effect, it seems that a number of firms have missed these rules, as they were overshadowed by the lock-downs and short selling bans. However, these new French rules are important as:

• they are of immediate impact to newly passported EU UCITS (and newly created French funds); and
• all funds marketed in France prior to 11 March 2020 will have to update their marketing documentation by 30 November 2020.

This note focuses on the impact on non-French UCITS passported for sale into France.

In summary, funds taking into account non-financial characteristics (eg environmental, ethical, low carbon, governance or green criteria) in their investment decisions without a “significantly engaging methodology” will not be able to focus on such criteria when marketing in France.

Note that the AMF has intentionally sought to issue this guidance before the application of the Disclosure Regulation on sustainable finance (Regulation 2019/2088). The guidance is composed of a number of Positions and Recommendations.

An AMF position is an interpretation of law and regulation that falls within the remit of the AMF – and explains how the AMF will apply such rules (as a result they should be followed). Recommendations, as their name suggests, are not binding; but rather an indication that acting in a particular way will be considered good practice – and in conformity with rules and regulations. It is possible to be in contradiction with a recommendation but compliance with laws and regulations (though the impetus would be for the investment manager to prove that it was in compliance despite not respecting the recommendation).

Position 1: proportionality principal

Funds must present their incorporation of non-financial criteria in a manner that is proportionate to the objective and effective impact of taking into consideration such criteria.

The AMF has flagged that this is especially important for products making these characteristics a “key aspect of communication” - this is defined as a presentation in the name, KIID or marketing materials (unless a very brief and very proportionate reference).

Position 2: significantly engaging methodology

Only funds that have a “significantly engaging methodology” make present these criteria as a key aspect of their communication to investors. A “significantly engaging methodology” is explained as:

• requiring (in the prospectus and incorporation documents (and possibly KIID)) measurable objectives regarding the consideration of these non-financial criteria;
• significant engagement in one form of other (typically involvement some form of reduction of the investment universe by 20% or more);
• at least 90% of the investment universe (by AUM or number of issuers) must be analysed; and
• for funds proposing SRI factors, this analysis must be carried out in relation to each environmental, social and governance factor.

The AMF has gone into detail to clarify these points, in particular highlighting that simple screening approaches (ie removal of weapons manufacturers from the investment universe), is insufficient to meet its requirements.

Recommendation 1: where non-financial factors are a key element of any communication

Such funds should:

• publish a document explaining the investment manager’s approach modeled on the Transparency Code (see here); and
• adhere to a charter, code or label regarding the criteria relating to fulfillment of social, environmental and governance quality objectives. In the particular case of funds using the SRI indication and marketed as such, it is recommended that they obtain the SRI label.

Recommendation 2: where non-financial factors are a key element of any communication

The regulatory documents (prospectus, incorporation documents etc) for such funds should present:

• an investment objective describing the non-financial aspect of their management;
• the type(s) of approach practiced (best-in-class, best-in-universe, etc.); and
• indications regarding the selection and management methods used.

Cross references to other documents, going into more details on the chosen methodology, are permitted.

Recommendation 3: where non-financial factors are a key element of any communication

In the KIID, the AMF recommends that a description of the non-financial strategy be given via a presentation of:

• the type of approach(es) used (eg best-in-class, best-in-universe, thematic etc.)
• a summary of the process of consideration of non-financial characteristics (eg filters, ratings, etc.) and sequencing relative to the financial strategy; and
• a few examples of some of the most important non-financial criteria analysed (eg two or three examples).

Position 3: where non-financial factors are a key element of any communication

When the KIID mentions consideration of non-financial criteria, it should describe concisely the main methodological limits to the non-financial strategy implemented when they are significant (within the size limits stipulated by the KIID and referring to the prospectus for more details when these aspects require detailed explanations). When the KIID does not provide such information, these explanations should appear in the prospectus.

Recommendation 4: regarding specifically investments in green bonds, social bonds or sustainability bonds

The AMF recommends inserting in the KIID an explanation of the criteria to be complied with for the selection of green bonds or social bonds, in particular by mentioning the investment management company's stance with regard to the application by the issuers of recognised standards in this area such as the Green Bond Principles or Social Bond Principles, or the future EU Green Bond Standard. The AMF also recommends that more detailed explanations concerning these standards be given in the prospectus.

Position 4: where non-financial factors are a key element of any communication

The following information should be presented in the prospectus:

• the minimum measurable objectives adopted in accordance with Position 2; and
• the portfolio's minimum rate of non-financial analysis.

Recommendation 5: where non-financial factors are a key element of any communication

The AMF recommends presenting details of the fund's non-financial selection process in the prospectus by describing:

• the type of approach(es) used;
• a summary of the process of consideration of non-financial characteristics (eg filters, ratings, etc.) and its sequencing relative to the financial strategy; and
• a list of the main non-financial criteria adopted which does not adversely affect the clarity of the non-financial information presented due to the number of criteria. Where applicable, reference can be made to other documents (Art. 173 reports, Transparency Code, regular reports, etc.).

Recommendation 6: specific case of funds mentioning the existence of a shareholder engagement policy

When the regulatory and marketing documents mention the existence of an engagement policy, the AMF recommends that it specify the procedures for accessing the documents that provide details on these aspects (voting and engagement/dialogue reports).

Position 5: applicable to the marketing in France of UCITS referring to non-financial criteria

Building on previous AMF guidance, a non-financial characteristic that is not present in the regulatory documentation of a UCITS cannot be mentioned in the marketing materials.

Recommendation 7: applicable to UCITS making non-financial characteristics a key aspect of communication

The AMF recommends that non-financial reporting (whether incorporated in conventional financial reporting or not) be easily accessible from web pages dedicated to SRI, ESG or socially responsible thematic funds and that it be updated at least once a year.

Recommendation 8

Concerns the presentation of marketing (notably when comparing against indicators or analysing the contribution of non-financial factors on financial performance). In particular, investment managers and distributors are recommended to add warnings in the marketing materials concerning the potential limits of the non-financial strategy in a manner as visible as the benefits of such strategies.

Position 6

In order to ensure that the information is clear and accurate and not misleading, commercial documents, DICI and prospectuses of UCITS using the term SRI must indicate that they do not benefit from the SRI label when they are not labelled.

Position 7: applicable to the marketing in France of EU UCITS making non-financial characteristics a key aspect of communication

In order to ensure the supply of “good information” to investors, if an EU UCITS does not company with Positions 1 to 4 and 6 must add specific warnings to their marketing documents.

Whilst annoying, at least this a contrario, allows funds that don’t meet the criteria to still be sold in France. Though note that the AMF have flagged that such UCITS “represent such a risk of inappropriate marketing that it would be extremely difficult to comply with the applicable legislative and regulatory obligations regarding marketing.”

Position 8: only applicable to French feeder funds of non-French master UCITS making non-financial characteristics a key aspect of communication

The following table (prepared by the AMF) summarises the various applicable policy measures.