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Transparency is key Articles 6, 8 or 9

10.01.2022 5 Reading Time

klimaVest: Redakteur Christian
Christian Hennighausen

The EU Disclosure Regulation has been in force since March 2021, and the EU Taxonomy Regulation came into force at the turn of the year as a further step towards sustainable investment. Numerous funds on the market are already dealing with the new sustainability categories: Article 6, Article 8 or Article 9 – institutional investors now have to wrestle with these new terms, just like retail investors. What’s behind all this?

Sustainable Finance Disclosure Regulation (SFDR)

Contrary to what is often thought, the Disclosure Regulation does not stipulate any specific sustainability criteria for financial providers or products – and certainly does not require them. Rather, there is a requirement for transparency: the fund providers must disclose their strategies in dealing with sustainability risks, comply with transparency obligations and assign their products to certain sustainability categories, for which different transparency standards then apply.

Taxonomy Regulation

In turn, the Taxonomy Regulation defines criteria for sustainable economic activities, whereby sustainability currently refers to climate and environmental aspects in this context. The Taxonomy Regulation is to be implemented in two steps: from the beginning of 2022, the focus is on “climate change mitigation” and “climate change adaptation” and from the beginning of 2023, on the other three environmental aspects.

Taxonomy-aligned activities are currently the ultimate activities. For example, the klimaVest renewable energy plants are all reviewed to ensure they are taxonomy-aligned and thus contribute to the main objective of climate change mitigation without significantly adversely affecting the remaining environmental aspects.

The Disclosure and Taxonomy regulations are therefore two different regulations, with the Disclosure Regulation and the Taxonomy Regulation intertwining.

Article 6, Article 8, Article 9

The Disclosure Regulation requires management companies to meet certain transparency requirements for their investment products, often referred to as investment products pursuant to Articles 6, 8 or 9.

Article 6: Transparency when considering sustainability risks – it is disclosed whether and how sustainability risks are taken into account in the investment process. If they are not taken into account, this must be mentioned and substantiated.

Article 8: Transparency in the application of environmental and/or social characteristics in pre-contractual information – if fund products with certain sustainability characteristics are promoted, they must also be presented transparently and included in the annual report. In regulatory technical standards, these Article 8 funds are often referred to as 'light green'.

Article 9: Transparency in pre-contractual information for sustainable investments – special requirements apply if funds have not only committed themselves to certain sustainability criteria, but also to a specific, sustainability-related investment objective. Article 9 funds are also referred to as “dark green”. Commerz Real’s klimaVest ELTIF falls into the Article 9 funds category.

The diagram shows the different criteria of the grades of non-ESG funds to the impact product in distribution (MiFID II). ESG and ESG impact impose strict requirements on sustainability strategies. This means that investors now have more transparent information about the sustainability aspects of a fund and can therefore make a more conscious decision regarding their sustainability preferences.

klimaVest: Die Grafik zeigt die Abstufung des ESG Impacts.
Source: BVI, target market concept of the associations, as of: 03/2021

An existing fund may also be classified as sustainable in accordance with Article 8.

That is why it is not a contradiction if a real estate fund established for decades positions itself as an Article 8 fund. Commerz Real’s hausInvest fund was one of the first open-end Article 8 real estate funds in Germany.

Against this background, would it not be expedient if all real estate funds met the requirements for Article 9 in the long term if possible? Not necessarily, because the effort required for implementation (e.g. impact due diligence) is challenging from a regulatory and technical perspective. In terms of Article 8, it can also be clearly stipulated that sustainability criteria such as a gradual reduction in the carbon footprint at portfolio level must be continuously implemented and monitored, and that certain requirements be placed on new acquisitions.

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