As environmental, social, and governance (ESG) considerations become increasingly important to investors, private equity firms are facing pressure from limited partners (LPs) to become more sustainable.
However, it can be challenging for Article 6 funds to understand what requirements they need to fulfill to become Article 8 or 9 funds under the Sustainable Finance Disclosure Regulation (SFDR). In this blog post, we will explore the challenges that Article 6 funds are facing, the regulatory requirements for Article 8 funds, and how the Briink SFDR solution can help managers of Article 6 funds switch from “grey” to ‘’green’’ with ease.
Whether you are a private equity firm looking to navigate the complexities of SFDR compliance, or an investor seeking to invest in sustainable funds, this post is for you.
Article 6 funds face several challenges in their quest to become sustainable fund managers. One of the biggest hurdles is the lack of clarity around what constitutes an Article 8 or 9 fund under the SFDR. The regulation sets out detailed requirements for sustainable funds, including disclosure obligations and mandatory ESG criteria.
However, the guidelines are complex and often vague, making it difficult for Article 6 funds to determine which criteria they need to meet to transition to a higher sustainability rating.Another challenge that Article 6 funds face is the sheer volume of data required to comply with the SFDR. Sustainable finance reporting is a data-intensive process, and Article 6 funds often struggle to gather and analyze the necessary information. This is particularly true for funds that invest in a diverse range of assets and companies, each with its own unique ESG characteristics.
A recent report by PwC Luxembourg surveyed 51 alternative investment fund managers, Ucits ManCos and super ManCos to gain insights into their ESG-related commitments with respect to the SFDR. The report found that 86% of respondents manage at least one Article 8 fund, while fewer manage at least one Article 9 fund. Most of the surveyed managers are planning to upgrade at least one fund from Article 6 to Article 8, with a smaller proportion planning to upgrade from Article 8 to Article 9.
Without the right tools and expertise, it can be challenging for these funds to collect, process, and report on their ESG performance in a meaningful and accurate way. In the next section, we will explore what regulatory requirements Article 8 funds face and how Briink's SFDR solution can help Article 6 funds overcome their challenges and comply with the requirements needed to become Article 8 funds.
Since the introduction of the SFDR, several investment products have been downgraded from Article 9 funds to Article 8. This has caused concern among some investors, who may view this as a dilution of the sustainability credentials of these funds. The reason for these downgrades is that the SFDR requires a higher level of transparency and reporting for Article 9 funds than for Article 8 funds. For some investment products, meeting these higher requirements may not be feasible or practical, leading to a downgrade to an Article 8 fund.
This does not necessarily mean that the fund has become less sustainable, but rather that it does not meet the higher reporting requirements of an Article 9 fund. Investors should therefore look beyond the category of the fund and consider the specific ESG criteria and methodology used by the fund, as well as its overall sustainability goals and performance, before making an investment decision.
Although less ambitious than funds under the scope of Article 9, Article 8 funds must also meet extensive regulatory requirements related to their ESG integration and disclosure practices. Specifically, these funds must demonstrate that they incorporate sustainability risks into their investment decision-making processes, and disclose how this is done. When applicable, they must also provide details on their ESG commitments and how they measure clear and comprehensive information on the environmental and social impact of their investments, including any negative effects, and explain how they manage these risks, for example, through Principal Adverse Impacts (PAIs) reporting.
Finally, these funds must disclose their remuneration policies with respect to ESG risks. Overall, the goal of these requirements is to provide investors with greater transparency into the ESG performance of Article 8 funds and enable them to make more informed investment decisions. These requirements should not be taken lightly. Beyond the surface, there is a high level of hidden complexity.
For instance, a common misconception is that funds that consider PAIs automatically fall under the scope of Article 8. According to the most popular view, this is not the case: to be considered Article 8, they must also explain PAI indicators into investment decisions.
Briink streamlines data gathering between funds and portfolio companies by creating a collaborative environment. Our platform structures the entire reporting process so you can feel confident in the assessments being conducted by you and your portfolio companies.
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Private equity firms are facing increasing pressure from investors to become more sustainable, and many are seeking to upgrade their funds from Article 6 to Article 8 or 9 under the Sustainable Finance Disclosure Regulation (SFDR). However, this can be a complex and challenging process, with regulatory requirements and data gathering and reporting obligations to navigate.
The Briink SFDR reporting solution offers a streamlined and collaborative approach to help funds make the transition to higher sustainability ratings with ease. By providing a structured and verified data-gathering process, simplified regulatory disclosures, and an auditable trail, Briink can help private equity firms navigate the complexities of SFDR compliance and become more sustainable.
Are you looking to bring your sustainable investment strategy to the next level and transform your fund from Article 6 to Article 8?
Our 60-day program takes you and your portfolio companies from ‘’grey to green’’ combining scalable software and best-in-class sustainable finance advisory. You can download the program brochure here.