On 1 January 2023, the Level 2 requirements under the Regulatory Technical Standards (RTS) for the EU Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation, generally known as “SFDR Level 2”, will come into effect. From that date, financial market participants such as asset managers and management companies of financial products such as UCITS will need to comply with the SFDR Level 2 requirements. The requirements under the RTS cover four main areas:

  • Template pre-contractual disclosures for financial products falling under Article 8 and Article 9 of SFDR;
  • Website disclosures for Article 8 and Article 9 financial products;
  • Template principle adverse sustainability impacts statement; and
  • Template periodic disclosures for Article 8 and Article 9 financial products.

For the purpose of this article, we will look at the pre-contractual disclosure requirements for SFDR Article 8 and Article 9 funds and the relevant regulatory requirements in Hong Kong.

The RTS sets out detailed requirements for pre-contractual disclosures for Article 8 and Article 9 funds. In order to allow for consistency in reporting across funds and to ensure that investors have comparable information to make informed investment decisions, pre-contractual disclosures must be made using the mandatory templates that are set out in the annexes to the RTS for the relevant financial product. The mandatory templates are in Q&A format and the information will need to be attached as an annex to the pre-contractual documentation, e.g. prospectuses.

With less than three months to comply with the SFDR Level 2 requirements, we note that many UCITS are updating their prospectuses to comply with the pre-contractual disclosure requirements. For retail UCITS authorised by the Securities and Futures Commission of Hong Kong (SFC), management companies should also ensure that the relevant SFC post-authorisation requirements (including any regulatory approval and investor notice requirements) are complied with in respect of the changes to the prospectuses. In general, if the relevant changes are considered to be non-material changes, SFC prior approval would not be required. However, the management companies will need to confirm:

  • the changes do not amount to a material change to the fund;
  • there will be no material change or increase in the overall risk profile of the fund following the changes; and
  • the changes do not have a material adverse impact on holders’ rights or interests (including changes that may limit holders’ ability in exercising their rights).

Additional requirements (including disclosure requirements) will need to be observed if the authorised UCITS is marketed as an ESG fund in Hong Kong, i.e. a fund which incorporates environmental, social and governance (ESG) factors as its key investment focus and reflects the same in its investment objective and/or strategy.

Following the regulatory clarification of the SFDR by the European Commission that a fund with a sustainable investment as an objective should only make sustainable investments, some SFC-authorised UCITS which invest in non-sustainable investments will no longer satisfy the requirements of SFDR Article 9 and the classification of such UCITS may need to change from Article 9 to Article 8 under the SFDR. Management companies of these UCITS will need to consider the implication of the re-classification, the actual changes involved (e.g. any change to the investment objective, investment policy and/or risk profile of the fund), the nature of changes (e.g. material or non-material changes or purely clarification or enhancement of disclosures) and comply with the relevant SFC requirements (including any regulatory approval and investor notice requirements).