France - Layers and labels
The SFDR framework will be applied in France and will broadly remain unchanged. However, the AMF released a modification, which came into effect on 1 January 2023. Marie Luchet, head of ESG advisory for UK and Europe at ACA Group, explains how the AMF requirement works: “The AMF is requesting GPs to disclose if there is a significant change in their taxonomy alignment, which is something not required by SFDR. For example, if there is a reduction of more than 10% in relative value and 500 points in absolute value of the fund’s minimum percentage of taxonomy alignment, the AMF is requesting that managers make this approach known via an investment letter.”
It’s not what you say, it’s how you say it
There has been plenty of feedback from fund managers about the increasing complexity and lack of clarification regarding the constant ESG regulatory updates across the EU. The SFDR Level 2 updates are overarchingly an attempt to improve transparency for investors. This is perhaps why GPs are restricted to a certain template when disclosing their sustainability measures.
For fund managers investing directly in sustainable products, the task has probably been easier. Bettina Denis, head of sustainability at Revaia, comments: “ESG is part of our DNA. SFDR requires some processes we already had implemented in our due diligence process and through our annual ESG assessment campaign. So, we didn't have to adjust much or implement a new process to be SFDR-compliant. However, SFDR is about disclosing ESG information in the most transparent way possible for investors. As a result, I think the challenge we face is about making sure we meet the high level of disclosure required by the framework.”
Despite the stringent framework, the AMF advised that it was possible not to include sections of the disclosure template that were not relevant. However, it is preferable to write ‘N/A’ rather than removing the section completely, as this provides better clarity to investors.
When asked about possible developments of the SFDR regime, Denis said: “Under the scope of Article 8, there are funds that are very engaged with each of their portfolio companies to implement sustainable roadmaps enabling them to achieve their targets. On the other hand, there are funds with a less active approach – both are in the same bucket. So, probably in time, I predict an official distinction between both practices or a labelling process. But we just don't know yet.”
The defining label
France has its own labelling tool that predates the UK’s SDR labels and SFDR, with its very own ambiguous acronym, the SRI (socially responsible investment) label. The management approach takes into account ESG issues, which supersede factors such as financial risk and return.
Created in 2016 by the French Ministry of the Economy and Finance, the SRI label intends to distinguish investment funds with measurable results using its socially responsible investment methodology. An independent body is responsible for assessing whether the fund complies with the label’s specifications, which were updated back in 2020.
To obtain the identification, the candidate fund must do the following: define its ESG objectives, establish an analysis methodology, construct and coordinate the portfolio, engage stakeholders, measure impact indicators to report back to investors, and assess the impact of the approach using an ESG rating.
The point is, for countries in the EU such as France, which already have a labelling system in place, the SFDR framework is an added layer of ESG regulation that, although with a defined purpose, brings with it gaps in the disclosure requirements.