The EU's Sustainable Finance Disclosure Regulation ("SDFR") has been on the European statute book for a few years now and financial market participants caught by it are becoming accustomed to preparing the pre-contractual and website disclosures it requires. With that said, the regime is constantly evolving. At present there are parallel proposals to refine SFDR from the European supervisory authorities and at the same time, from the Commission, early steps towards a significant overhaul, creating "SFDR 2.0".
A tricky aspect of the rules at the "greener" end of SFDR is the requirement that all investee companies exhibit "good governance". The phrase in this context is intended to capture four broad categories of governance such as tax compliance, but its application to real estate funds is somewhat unclear. While it is relatively clear that a directly-held real estate asset is not an "investee company", asset managers are taking a variety of approaches reflecting the complexity of holding structures. In some instances, they may look to property managers to satisfy the good governance test, including through specific contractual provisions in property management agreements.
Many UK asset managers are already impacted by SFDR, but they will shortly have a UK-specific regime to grapple with. The FCA published its Sustainability Disclosure Requirements ("SDR") regime on 28 November. Unlike SFDR, SDR is in part a labelling regime with four categories of sustainability label, with three reflecting a slightly different sustainable investment focus and one for mixed sustainable funds. The requirements will be phased in between 31 May 2024 and 2 December 2026. Notably, any entity regulated by the FCA will need to comply with the anti-greenwashing rule – a reinforcement of the existing requirement to ensure communications are clear, fair and not misleading. Though it is too early to say what approach investors will take to the new labels, it is conceivable that already highly energy efficient buildings will be attractive targets for "Sustainable Focus" funds, while "Sustainable Improvers" investors are likely to be seeking out assets with demonstrable potential for performance improvement. Increased due diligence might be a side-effect of the regime, which may include rigorous requirements for the proportion of investments in a fund that must meet the criteria in order to use the label. See further details in our briefing.
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