AMF Doctrine relating to sustainable finance and investor information in the collective management industry
In this OnPoint, we report on new measures required by the French regulator (Autorité des Marchés Financiers (“AMF”)) for the purpose of ensuring that information provided to investors in relation to non-financial criteria (and in particular relating to sustainable investing) is proportionate to the actual importance of these factors in the investment process referred to in this OnPoint as the “AMF Doctrine”).
AIFs (that are not reserved to professional investors) and/or UCITS which currently, or intend to, market their financial products in France will need to undertake a full review of the requirements under the AMF Doctrine as further described below. The review should:
- Consider whether the current disclosure of non-financial objectives in the offering documentation and marketing materials are a “key aspect” of communications with investors per the AMF Doctrine;
- Consider whether the non-financial objectives can be said to form part of the investment strategy of the AIFs/UCITS in accordance with the AMF concept of “significant engagement”;1
- Consider, in light of the determinations made in assessing points (1) and (2) above, whether the AIFs/UCITS will incorporate the required investor disclosures or comply with the minimum standards stipulated by the AMF Doctrine; and
- Assess what steps need to be taken if the AIFs/UCITS elect to comply with the minimum standards and make sure that such steps are taken in compliance with the timeline below.
Given the increased interest from investors and asset management firms (whether they manage AIFs or UCITS) (“ManCos”) in sustainable finance, and the increasing regulatory scrutiny in this area, the AMF has prepared a positon paper – Position-Recommandation AMF 2020-03 (French version is available here and English version is available here) – setting out its expectations of ManCos when providing investors with non-financial information relating to sustainable investing in connection with their investments. The AMF’s aim is to ensure that investors receive information that is consistent and enables comparison with similar products, while at the same time preventing ‘greenwashing’.2
On 11 March 2020, the AMF presented this new doctrine entitled ‘Information to be provided by collective investment schemes incorporating non-financial approaches’ to the French press, emphasizing its view that “sustainable” investment management should be a priority for the asset management industry (see the AMF presentation, in French, here).
The AMF does not provide a definition as to what non-financial information is, but it would seem that while all non-financial information is in scope, the focus here is on sustainable finance-linked disclosure such as environmental, social and governance ("ESG") criteria.
From 13 March 2020, all in-scope funds using sustainability-linked descriptions, (such as SRI, ESG, sustainable, responsible, green, ethical), as well as those promoting the sustainable nature of their financial instruments in their marketing communications will need to demonstrate the difference between their ‘sustainable’ portfolio and more traditional investment approaches.
The principle behind the AMF Doctrine is that a standard methodology needs to be developed to enable market participants to measure and compare non-financial criteria and such a methodology must be aligned with those factors that market participants regard as important. The stated objective of the AMF Doctrine is to establish “a set of minimum standards allowing non-financial criteria to be made a key aspect of product communication”.
In order to do so, the AMF Doctrine is focused on two key concepts – “significant engaging methodology” and “key aspect [of communication]” which are considered further below.
The “significantly engaging methodology” criteria under the AMF Doctrine
The AMF Doctrine provides for the concept of a “significantly engaging methodology”3 which can be interpreted as follows.
A ManCo can be said to have a “significantly engaging methodology” in respect of a fund if:
- It communicates, in the constituting documentation of its fund (such as the prospectus), how it is engaging, in a meaningful way, in sustainable investment activities;
- It commits to consider and use non-financial criteria as part of the fund’s investment objectives;
- The identified non-financial criteria has a significant impact on the identified sustainable investment objective;
- The non-financial analysis or non-financial rating performance is undertaken in respect of at least 90 percent of the portfolio investments of the relevant fund; and
- The ManCo ensures that the proportion of the fund's net assets that are not analyzed remain insignificant.
An example provided by the AMF of a fund in compliance with the “significantly engaging methodology” criteria was of a fund that selected its investments by using criteria that excluded from its portfolio the 20 percent of issuers with the lowest ESG rating from the investment universe.
The AMF Doctrine provides for certain approaches to be used in order to determine the significance of the non-financial criteria, making it clear that when looking at the degree of sustainability, comparison must be made with “the investment universe that would have been selected for a similar fund not presenting non-financial characteristics, to avoid an ‘artificial’ reduction or improvement in the investment universe. For this purpose, the composition of this universe should be determined exclusively on the basis of the fund’s strategy and the assets that it is able to select”.
The AMF provides an example4 of artificial improvement: a fund labelled “European ESG” should not be compared to a global investment universe, as such a comparison would post an artificial improvement made possible by the selection of “Non-European” issuers which are less well rated from an ESG viewpoint.
Likewise, comparing a “hospitality sector” fund with the “tourism” investment universe raises the same issue because of the selection of issuers in the airline industry (which would be captured by tourism but not by hospitality), which are likely to be less well rated from a low carbon point of view.
The AMF Doctrine distinguishes between ManCos that have an approach in respect of a fund based on a “significantly engaging methodology” and those who do not. This distinction has consequences on the information which must be provided to investors and the ability to use non-financial characteristics as a ‘key aspect’5 of communication with, and disclosure to, investors.
Non-financial characteristics as a “key aspect” of communication with investors
Under the AMF Doctrine only funds which have a “significantly engaging methodology” may include non-financial characteristics as a “key aspect” of their communication with investors. The AMF recommends that expressions that imply a focus on environmental, social or governance should not be used if such a focus in inappropriate for the investment policy implemented by the fund. Accordingly, ManCos can only refer to the sustainable nature of their fund’s investment objective in the name of the fund, the offering document and other marketing documentation and investor communications where the fund satisfies the “significantly engaging methodology”.
ManCos that have a “significantly engaging methodology” are required to provide investors with certain specified additional non-financial information such as measurable objectives (e.g. a reduction of the investment universe by 20 percent in a selectivity approach), main limits of the approach (e.g. a potential inconsistency between the SRI/ESG strategies of the underlying funds for funds of funds). According to the AMF Doctrine, any statements relating to the non-financial characteristics must still comply with the general principles applicable to disclosures in the field of asset management: i.e. information must be “clear, accurate and not misleading”.
ManCos that do not have a “significantly engaging methodology” must limit the information relating to non-financial characteristics that they provide to investors. The non-financial information must be very brief and proportionate in the marketing documents (i.e. the amount of non-financial information provided to investors is reflective of the actual importance of such information in the fund’s strategy as a whole).
The AMF recognizes that it may have to clarify or amend its doctrine to reflect changes in market practices and European legislation such as the Disclosure Regulation (EU) 2019/2088.6 The AMF is also working to clarify how funds may disclose the fact that they take non-financial criteria into account in their management without making this a ‘key factor’ in the context of the AMF Doctrine, such that they fall foul of the requirement to limit language relating to non-financial information.
Scope of the AMF Doctrine
The AMF Doctrine applies to collective investment products (including both AIFs and UCITs) which are authorized for marketing in France to non-professional investors, whether they are established in France or abroad. Therefore, this AMF Doctrine will have an impact on the fund managers’ communication about their products, in particular those which have investment objectives which are “non-financial”. Although these new rules capture all types of collective investment products, regardless of their specific legal structures, it is more likely to impact on UCITS as these are by their nature retail products. The AMF Doctrine sets out the regulator’s expectations with regards to non-French incorporated UCITS which (i) have been authorized by the AMF to market their UCITS in France, and (ii) include non-financial characteristics as a key aspect of their marketing communication.
The AMF’s view is that non-French incorporated UCITS that do not comply with those provisions set out in positions one to four and six of the AMF Doctrine (which are the positions that set out the criteria for determining the significantly engaging methodology” and “key aspect of communication”) “represent such a risk of inappropriate marketing that it would be extremely difficult to comply with the applicable legislative and regulatory obligations regarding marketing.”
The AMF Doctrine goes on to say that those non-compliant UCITS must prominently include the following statement in the marketing materials:
“Investors should note that, relative to the expectations of the Autorité des Marchés Financiers, this [UCITS] (Nota: insert the name of the relevant UCITS) presents disproportionate communication on the consideration of non-financial criteria in its investment policy”.
Using the same analysis commonly applied when considering the application of PRIIPS regulations,7 one would expect that a ManCo of a UCITS marketed only to professional investors, and which includes express statements in the marketing material and legal and regulatory documentation limiting the subscription and acquisition of units or shares solely to professional investors, would not be subject to the requirements set out in the AMF Doctrine. However, upon inquiry, the AMF has confirmed that the requirements set out in the AMF Doctrine apply equally to all funds authorized for marketing in France to non-professional investors, regardless of whether or not this authorization is actually exercised. Consequently, a non-French incorporated UCITS that is only marketed to professional investors (i.e. non-retail), and even if its legal documentation includes a restriction limiting subscription to professional investors, would need to comply with the AMF Doctrine and either include the statement set out above in its marketing materials or comply with the disclosure requirements in the AMF Doctrine. Based on the exchanges that we had with the AMF we can reasonably conclude that the AMF’s position is that once a market participant chooses a vehicle that is by nature open to non-professional clients, all the relevant rules should apply.
Timing of entry in force
Any fund making a new notification of cross-border marketing of a foreign-based UCITS to the AMF will need to comply with the provisions of the AMF Doctrine immediately. Existing funds will have to comply with the provisions of the AMF Doctrine by 30 November 2020 at the latest. The AMF’s timeline is ahead of that of the Disclosure Regulation which, at the EU level, is trying to achieve a similar outcome in relation to the disclosure of sustainable investment criteria and which does not require updates to prospectus disclosures until 10 March 2021. This may result in ManCos needing to update their fund documentation more than once where they fall within the scope of the AMF Doctrine as well as the Disclosure Regulation.
1) In French : “approche fondée sur un engagement significatif”.
2) Delegated RegulaGreenwashing is the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound.
3) Per the AMF Doctrine, “significantly engaging methodology” is defined in the position n°2 of the AMF Doctrine.
4) This is an example taken from an AMF power point presentation given at the publication of this new doctrine. It refers to an example of engaging methodology (regarding the “selectivity approach”).
5) The AMF Doctrine states that “Non-financial characteristics are considered a key aspect of communication when they are presented:
- In the name of the collective investment product; or
- In the KIID; or
- In the marketing materials, apart from a very brief and very proportionate mention.
- On the contrary, mentioning consideration of non-financial characteristics only in the prospectus in a proportionate manner is not considered as presenting them as a key aspect of communication”.
6) Dechert OnPoint: Disclosure Regulation – What Is It and Who Is Impacted?
7) Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs).