US fund managers raising capital though EU fund sleeves: mind the EU ESG disclosure rules – New York office Snippet

SFDR applies to US AIFMs when marketing an AIF to EU investors. In instances where it does not apply, certain EU investors themselves subject to SFDR may contractually impose equivalent standards to the US sponsor in order meet their own obligations. SFDR is consequently relevant for any US fund manager (“USFM”) dealing with EU investors.

The scope of these disclosures varies depending on whether the AIF aspires a “grey” (article 6 SFDR), “light green” (article 8 SFDR) or “dark green” (article 9 SFDR) status. A “dark green” AIF must only pursue sustainable investments that contribute to an environmental or social objective and do not cause significant harm to such objectives. A “light green” AIF promotes environmental and/or social characteristics. Other AIFs are “grey”.

USFM that intend to tap into the EU investor market will encounter that EU investors prefer green type of AIFs or have pockets of capital specifically dedicated to green AIFs. Green AIFs generally give a competitive edge in terms of EU branding and EU fundraising.

If a USFM intends to offer a green sleeve or feeder fund of a US fund to EU investors, it would in principle be expected for the other sleeves or the relevant US master fund to be subject to the same investment policy, although divergences may in practice be accommodated for. USFMs should thus consider whether access to green EU capital weights up against any potential concerns non-EU investors have with a green strategy.

Most USFM do weigh-in sustainability ambitions, risks and/or factors in their investment decisions in some sort of form. This does not immediately entail that they have to comply with light or dark green disclosing and reporting rules when offering such a fund in the EU. Only if the promotion of ESG criteria is a binding material element of the fund’s investment policy and if investments in underlying companies are screened for good governance, such disclosures and reporting rules would be triggered.

SFDR secures that sustainability claims are subject to transparency. In practice SFDR is also a tool for labelling and branding AIFs. USFM should consider SFDR when tapping into the EU investor markets and whether a light or dark green European fund sleeve impacts non-EU investor appetite for the wider fund.

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