The asset management industry has had a couple of weeks now to digest the updated draft version of the Regulatory Technical Standards (RTS), intended to clarify the Sustainable Finance Disclosure Regulation (SFDR). The original draft, that the European Supervisory Authorities (ESA) published in April 2020, was quite poorly received by the industry and so the expectations were high for the new, revised, version to rectify some of the flaws with the original proposals.
Most European asset managers have already come far with their plans for compliance with the principal adverse impact regime (PAI) in SFDR on a principles-based basis, as they are expected to comply with it as soon as from 10 March 2021. They should therefore be grateful for the clarifications provided in the new draft that resolve many of the issues which were raised by the asset management industry during the past year.
Certain questions remain however unresolved or unaddressed even in the February 2021 draft RTS. Hedge fund managers, for one, are bound to be disappointed as the new draft is still silent on how to treat some of the asset classes and instruments that they use frequently. It is still unclear whether positions in asset classes like commodities, currencies or interest rates, would be excluded from the scope of the PAI regime. And would their exclusion mean that the asset manager or its products are deemed to be non-compliant with the PAI regime or whether they can simply be disregarded? Not to mention investing in those asset classes through derivatives, which further complicates matters.
The old issue of short positions or short exposure is not resolved either, although the current draft does acknowledge it in the summary of the feedback received to the April 2020 draft: “Some respondents also called for more clarity regarding the correct way to account for alternative types of strategies, such as exposure through derivatives, or short strategies.”
Acknowledgement notwithstanding, ESA does not provide any guidance as to whether short positions should be disregarded altogether, treated as a negative number and subtracted from “positive” adverse impact exposure or treated as an absolute number and added to “positive” adverse impact exposure.
For now, the industry is focusing on the ‘good news’ that the first quantitative report will not be due until 30 June 2023, in respect of calendar year 2022, as it means there is no need to be actively tracking PAI data during 2021 for reporting purposes. At some point however, asset managers will have to tackle the devil in the details. Let us hope that by then the regulators will offer further clarity, hopefully aided by industry working groups to reach an industry consensus.