In this article, we will explore investor reporting under the AIFMD and ESG reporting under the EU Sustainable Finance Disclosure Regulation (“SFDR”).
Investor and ESG reporting
Under Article 23 of the AIFMD, the AIFM must disclose certain information concerning the AIF to its investors, prior to investing and updated as required. This information includes, but is not limited to:
- Investment strategy and objectives, and associated risks
- Investment restrictions
- Details of leverage and collateral arrangements
- Valuation methodology
- Latest annual report (Article 22)
Furthermore, the SFDR has introduced additional reporting requirements for investors, alongside those of Article 23 of the AIFMD, which include:
(i) A categorisation of the AIF under SFDR, depending on the extent to which ESG issues are addressed by the AIF
(ii) Further disclosure on the impact of environmental and/or sustainable issues on investment decision-making
(iii) Categorisation of AIF products under SFDR
(iv) Capturing relevant data from portfolio companies
(v) ESG-related disclosures on group websites
There are detailed disclosure templates that must be used for the above disclosures. The SFDR implements a tiered categorisation of financial products, including funds, as follows:
- Article 6 – Financial products that typically only consider major ESG risks or impacts in investment decision-making
- Article 8 – Financial products promoting environmental or social characteristics
- Article 9 – Financial products with the objective of “sustainable investments” (including a specific subset with a reduction in carbon emissions as an objective)
For both Article 8 and Article 9 funds, disclosures must describe the extent to which investments are in economic activities that qualify as environmentally sustainable under the Sustainable Finance Taxonomy Regulation.
Capturing data from portfolio companies to prepare ongoing reports under the SFDR has proved challenging for some AIFMs, particularly where smaller portfolio companies have no or limited resources to dedicate to ESG data gathering.
How can we help?
Our team is currently working with Paul Hastings to assist with marketing enquiries into the EU and the UK. Zach Milloy, a partner at Paul Hastings, can assist with the registration requirements. Once registration is complete, we can help with ongoing investor reporting requirements. Additionally, our team at Holtara, part of the Apex Group, can support compliance with the complex ESG requirements of the SFDR.
For further information, get in touch with our AIFMD reporting team.
