Dutch regulator AFM publishes critical report on SFDR implementation

On 14 September 2021, the AFM published a report containing the results of its research on the implementation of SFDR. The report sets out the findings following an information request from the AFM to Dutch authorised fund managers earlier in the year.

What is it about?

The AFM’s research was concentrated on the pre-contractual disclosures and the classification of the funds required under articles 6, 8, and 9 of SFDR.

Which firms should care?

The results of the research and the AFM’s observations and conclusions are relevant for all firms subject to SFDR. Looking at the focus on pre-contractual disclosures and classification of funds under articles 6, 8, and 9 of SFDR and given the scope of SFDR, the findings in the report are particularly relevant for authorised fund managers, sub-threshold fund managers, as well as non-EU fund managers that market funds in the Netherlands under the national private placement regimes.

What should they know?

The AFM received information on more than 1250 funds. This information shows that:

• 57% of the funds have no sustainability focus (article 6);
• 35% of the funds do not have a sustainable investment objective, but do promote environmental or social characteristics (article 8); and
• 8% of the funds have a sustainable investment objective (article 9).

The AFM finds it important that funds that claim to be sustainable are transparent in how they attain their sustainable objective. In general the AFM concluded that all fund managers of funds with sustainable characteristics or objectives have included information on sustainability in their prospectus.

However, the AFM sees room for improvement with respect to the quality of this information, in particular with respect to further substantiation of choices and/or statements made. The AFM also questions the classification for a significant part of the funds that it has reviewed, mentioning that the disclosed in the prospectus did not by itself merit the current classification.
The conclusions of the report can be summarised as follows:

Integration of sustainability risks in investment decisions is unclear

The AFM takes the view that the information provided on the integration of sustainability risks in investment decisions is generally not sufficiently specific and often not tailored to the relevant fund. Also, in many cases the assessment of the likely impacts of sustainability risks on the returns of the fund is missing. The AFM expects concrete descriptions on both items.

Article 8 and 9 disclosures are not specific enough

The information that fund managers currently provide on the basis of article 8 and 9 SFDR lacks depth and is not specific enough. Especially with respect to article 9 funds, the AFM finds that a sufficiently concrete description of the sustainable objective of the fund is missing. The AFM notes that the disclosures for article 8 funds sometimes do not provide a concrete description of the environmental or social characteristics that the fund aims to promote. Additionally, in some cases there is no sufficient explanation as to how the investment sustainable investment objectives or characteristics are aligned with a fund’s investment policy.

Investment objectives often too broad

For a large number of the funds under review, the AFM queries the sustainability classification made by the fund managers. Especially for article 9 funds. Often, the investment objective seems to be broader than sustainable investments and the portfolio is not exclusively allocated to sustainable investments. The AFM believes that as a consequence, investors might have the expectation that a fund only makes sustainable investments, while this may not be the case. The AFM expects that fund managers that offer article 9 funds clarify how the investments made by the fund fall within the definition of ‘sustainable investment’ as provided for by SFDR.

When will this apply?

While SFDR already applies as of 10 March 2021, the RTS that further detail the high-level requirements of SFDR are only expected to enter into effect on 1 July 2022. The AFM’s report does not cover the requirements of the RTS. The AFM notes that fund managers are expected to undertake an assessment as to whether they comply with the requirements of the RTS, that managers are expected do this timely, and that managers take the outcome of this report into account in this assessment.

Any further thoughts?

The AFM recognises that SFDR only recently entered into effect and that due to the delayed publication of the European Commission’s Q&A and the lack of definitive RTS, there is unclarity as to how certain requirements must be interpreted. As such, the AFM understands that fund managers are not yet fully compliant and that there is room for improvement. The AFM, therefore, only provides general feedback and will not provide individual feedback to managers on the basis of the information they provided. The AFM does expect that managers take note of the results of the research as published in the report, and that they pay particular attention to correct product classification. The AFM will continue to monitor compliance with the SFDR and the implementation of the RTS, including fund managers’ approach to the AFM’s findings in the research report.