Hi and welcome to a new episode of a Real Deals podcast.
I'm reporter Jennifer Forrest, and on this podcast we're going
to be focusing on the SFDR regulation, which came into
force in March this year. Joining me, I have two guests.
Firstly, Eve Ellis, partner at Ropes and Gray, and also Danny
Williams, Senior Principal Consultant and ESG Advisory Team
Member at ACA Group. I'm hoping to talk to both of
these guests in this episode to talk about the SFDR regulation,
how they found it over the last few months, and what they would
like to see changed. And firstly, hi guys, welcome to
the podcast. I was wondering if maybe if you
could start off by talking me free what you've kind of found
in changing of reporting. In the last few months since
SFDR came into force. Sure and thanks.
I mean look I think the extent to which SFDR impacts managers
really depends on the classification of that
particular fund product and also whether they're an EU manager or
a non EU manager for those of our sort of manager clients who
have products that are Article 6 products.
So in that lowest level sort of a a conventional product?
The reporting requirements like there aren't any sort of ongoing
reporting requirements. So in that respect actually I
think SFDR hasn't been a huge shift.
There was obviously quite a lot that managers did in terms of
the prior implementation working out what classification their
products would have. But I think in that respect the,
the initial reporting hasn't been too significant and for
those managers that are able either to just apply the
principal adverse impact. Disclosures.
Again, the reporting has sort of not really been a huge issue for
managers. I think it's those managers that
are in the Article 8 or 9 or those that have decided to
comply with the principal adverse impact disclosures where
this is going to be something that is going to become more of
an issue. But I think at this stage,
because the reporting isn't effective, it probably hasn't
been a huge change in the last few months.
I think what the March deadline did was obviously mean that
managers needed to focus. On the initial SFDR
implementation and I think over the next 12 months, that's when
we'll see more ramping up and more focus on the ongoing
reporting requirements. For sure, Danny did.
You have anything to add? No, I think just literally to
mirror kind of you know what you've said, we're seeing kind
of the same things with all kind of our client base and you know
in the wider market where you know kind of under level one,
there wasn't actually too too many kind of reporting
requirements to start ramping up on for a majority of our base.
What we also saw too I think is with SFDR it it kind of
especially in terms of level one snuck up I think on on a lot of
people. You know, I know there was a bit
of a hesitation in the UK as far as managers over here waiting to
see if it was going to be applicable.
Obviously it was not onshore. So kind of good news in that
respect for those firms, but we've also seen actually quite a
few firms that because of kind of the lateness of getting
involved in you know, seeing how it was going to comply.
And maybe you know needing to not quite the manager level, but
having products in scope, a lot of people seem to go into the
direction of actually being kind of Article 6 initially.
And and we've had quite a few conversations and heard you know
kind of in the wider market of those firms actually looking at
what their reporting requirements are going to be,
should they transition to 8 or 9.
So I think, although, you know, maybe there's.
A little bit of kind of trial and error kind of going on in
the background to see you know in terms of reporting
requirements if they can meet that kind of next level
threshold in terms of actually doing the reporting as of yet.
Yeah. And Danny, actually I I would
agree with that. I think, look, a lot of clients
are within the Article 6 classification.
But again, I think over the next year or so, you might see sort
of clients once the reporting becomes a little clear as to
what they've got to do. So decide whether or not
actually. Their fund might sort of move to
sort of Article 8 and then they'll sort of begin to comply
with that respect, but sort of starting off with Article 6
because they're comfortable that at this point in time they can
they they can fit within that classification.
So I think we're sort of seeing similar things as well.
That's really interesting. I was wondering if, Danny, you
could talk us free and you kind of said how interesting it was
as to whether or not the UK would pick up SFDR with it being
an EU regulation. I was wondering if you could
talk us through the kind of biggest challenges from your GP
clients perspective that have kind of arisen since the
regulation has come into force. Yeah.
I think one of it's been kind of twofold.
Actually. One is a little bit, I would say
most slightly unrelated to SFDR, but I'll start with the 1st.
And I think the first one has been the pain point for for the
market as a whole is that there's still a lot of kind of
questions around the regulation. Most significantly the questions
that were sent by as A to asthma to kind of a point on where are
fairly significant, you know in determining whether or not kind
of firms need to comply with SFDR or how to comply with SFDR.
So I think still waiting on those at this point in the game
when you know firms need to try and make decisions if they are
going to go from 6 to an 8 and start ramping up their programs,
you know that that is causing I think still a pain point in
terms of. Whether or not they need to
comply and to what extent, what's actually been a little
bit interesting that we're seeing kind of more and more of
is the the impact that just having SFDR exist has had our
managers outside the scope of SFDR we're seeing an increasing
number of. Managers actually be requested
by either their investors or if they're a sub manager of a
larger kind of institution, being requested to look to
comply with SFDR. Although they may completely be
kind of out of scope or appear to be completely out of scope
for SFDR. So it's quite significant that
you know, we're getting this a lot, you know, in terms of not
just in the UK where there's a bit of a foundation in terms of
you know, prior to Brexit we were all kind of harmonized
under this one EU umbrella. But you know, now we're getting
US managers, we're hearing from Oz managers, we're hearing from,
you know, managers in Asia saying that their investors are
telling them to have some level of compliance with SFDR.
And actually are called 8:00 and 9:00 and that that's quite
significant in the fact that it doesn't comply to them.
And then how do you kind of transpose A regulatory regime
that's applicable in one area to a manager that has absolutely no
experience in that area? And again, there's, you know,
there's implications of SFDR that tied to Miff in A I FM D
and use its rules. You know, how does that kind of
work itself out? I think that's actually quite
significant because you know both sides don't know really
know what to tell each other and that you know you've got
investors and kind of European managers asking the question and
telling you know other institutions to go do this.
But you know there's not that kind of foundation or
understanding or the regulatory framework to go do it.
So I I think that is actually causing.
A bit of a pain point that we're seeing and a bit of kind of
confusion as to what that needs to look like.
So I think those two we're seeing the most kind of
questions around. I would, I mean Danny, I would
definitely agree. I think SFDR is something, it's
a really interesting piece of regulation because it has got so
much focus from investors because of the subject matter,
because the SG is such a key and central issue for investors and
it has been for. But for many years now and we're
we're seeing something similar where EU investors are putting
requests on managers that are not subject themselves to SFDR
and saying we want you to comply with SFDR.
And I think that it'll be really interesting to see how that
evolves over time. And also Danny, similar to your
point that will investors actually say that we only want
to invest in Article 8 or Article 9 products and therefore
SFDR sort of almost becomes a marketing and brandings of?
Tool that managers are using to be able to attract investors or
investors won't be investing in conventional products and I
don't think that's going to happen immediately, but it will
be interesting to see how that develops over the next sort of
12 to 18 months. For sure.
I think it's definitely really interesting to see how it could
become a marketing tool and what that kind of means for smaller
firms as well, whether they'll suffer because the kind of
bigger firms are using it more to their advantage.
My next question was actually going to be on investors.
Eve, I was wondering if you could kind of talk us through
how you kind of not predict, but expect kind of investors to,
yeah, let's say in the next 12 months to the outcomes of SFDR
reporting? I mean look I think as we've
we've probably sort of touched on that that a little bit
already, but I do think that. Investors are looking probably
at managers to do more nations at ESG reporting.
But what's interesting is I think investors were putting
those requirements on managers already prior to SFDR coming
into play. And so that has been very much
front and center and sort of part particularly sort of the
larger institutional investors and particularly from a European
perspective something that they have been requesting advantages
for some time now. So I think that's going to
continue and it's just going to be how much they.
Focus their reporting requirements on what's in SFTR
or whether they just stick to sort of other requirements that
they may be existing subject to already.
So I I think it will be interesting to see how things
pan out over the next 12 to 18 months from the investors and
what they want to see from investor reporting perspective.
And to your point in terms of you know, data and access, I
think that is one of the key issues with SFTR as well as how
how the managers actually get the data to be able to do the
reporting. It sets out, you know, in the
draft standards in the Level 2 at the moment.
And that again, I think it's going to be something that's
interesting and it depends very much on asset class, like if
you're a private equity manager taking control positions, it may
be easier to get that data compared to if you're a credit
fund manager. So we're also going to sort of
see how that evolves over time and I think just sort of one of
the points that Danny mentioned. One of the biggest issues with
SFGR is there is still so much uncertainty and that I think is
what people are are hugely grappling with at the moment in
terms of both the reporting, how they classify their products
when something becomes 6 to 8 from 8:00 to 9:00 and all those
things I think are hopefully going to.
You know, with future regulatory guidance and as the market
evolves, hopefully those things will become clearer as as time
goes on. Oh yeah.
I think for sure, if anything, even before the regulation was
brought out, it was quite clear that kind of confusion and
uncertainty were quite big themes for many GPS and other
firms kind of surrounding the SFDR regulation.
I would then ask you both. We understand this level 2.
Will be coming out early next year, which will build upon the
so-called level one element of SFDR where the EU Commission
will take on kind of feedback and learning from this year to
make the SFDR better. I wonder if you could both kind
of talk me through anything that you or your clients would like
to see changed with SFDR. And if you if you could pitch
anything to get changed, what would it be and why?
Oh, jump in. I think actually the first
thing, it doesn't actually have to do with Level 2.
It's literally the clarity that of the questions that were
already asked under level one. Again, it's very difficult for
managers to start thinking about reporting under Level 2.
If they don't know, they have to, you know and to what extent.
So providing that clarity and that understanding is to even
the difference between an Article 6 and an Article 8
product. You know, I mean although that
there's the investor pressure to kind of that we're seeing for a
lot of firms to start going Article 8 or Article 9.
As you know, we've just kind of spoke through, you know, for
those firms that do still have that option as to whether to be,
you know, a six or an 8, it's vital for them to kind of have
that clarity. There's questions I know around,
you know, whether firms that are marketing into Europe, you know,
is it going to apply just to the product or also at the manager
level as well. You know all of those little
things are, you know, vital in understanding kind of more of
what to do under level two. I think in terms of it, and
you've touched on this already, the kind of other thing that
kind of ties in tightly with that is the quality and the
reporting of the data. So although you know not
something that necessarily needs to change directly in the
regulation, but something that you know the quality definitely
needs to be there in order to assist firms in reporting under
Level 2. So whether that is you know
either and we're seeing a bit of a ramp up with data providers,
you know at least you know saying that that they're getting
more and more kind of availability of data and able to
report kind of more under principal adverse impacts and
other criteria. Whether or not it's going to be
there come Gen. one again it's going to be kind of a
interesting to see I guess there's to speak and then what
happens if it doesn't. You know this is going to impact
everyone across the board. If the data is not available for
you know one of them across these platform then it probably
is not available for others out there and then you know what's
the end result. So I think maybe potentially a
little bit of leeway. In terms of from a regulatory
standpoint, I don't think we'll actually the cynic and me saying
we won't, we won't get a pushback kind of any further you
know for Level 2 and reporting. But you know these are things
that that are going to come up, you know that we can kind of
foresee potentially occurring. So I'd say that those those two
are are kind of the key key pain points.
Yeah, I mean, I would, I would agree like having more clarity
across the board. I think will be really helpful
for managers. I think in terms of the
reporting, I completely agree having more leeway and
discretion for managers to decide how they report.
I think it's really important because unfortunately the
regulation can never be designed with all the different fund
types and all the different strategies in mind.
So giving invest, giving managers the discretion and
ultimately a lot of this, particularly in the
alternatives. Space has sort of already been
dealt with over the years as between investors and managers
because they negotiate their fund documentation.
Investors are sophisticated. They they have sort of the
requirements for example around ESG and those have been sort of
negotiated with investors having this overlay of sort of
prescriptive requirements that may not work for a particular
fund or a strategy. I think becomes really
challenging and probably adds more sort of administrative
burden necessarily having the right impact from an ESG
perspective. I mean SFTR certainly has been
helpful in terms of sort of creating a a baseline where all
managers now need to at least integrate and consider ESG.
But I think we've got to be careful that actually you with
the reporting being so prescriptive and difficult to
apply across potentially different aspect classes and
having the data actually available, I think it's going to
make it very challenging. For for people to manage in
practice. The other area I think that is
challenging for managers is the interaction between SFGR and the
taxonomy regulation. And I think at the moment that
is really unclear. And again that's something I
think is going to evolve. But I think that those managers
that are in that space where that product overlays both that
is even more challenging. And at the moment, when you look
at the different sort of drafts that are out there, it's just
it's very difficult to sort of work out what applies.
And how it works in practice. So that's an error.
I think there does need to be significant more priority as
well. That's really interesting.
Everything that you both said. I think it'll be really
interesting to kind of see if that changes.
And yeah, and and how, how it would and the kind of usefulness
that that would bring. I think that's a really nice
note to finish on. Thank you both for joining me on
this podcast and talking me through.
Kind of SFDR and how it is now. It's been really interesting to
discuss it.