AMF Ramps Up Sustainability Disclosures for Funds in France
Written in collaboration with the experts at InReg
The French Regulator has recently published on its website a recommendation relevant to all the fund managers employing techniques that are non-financial in nature when managing funds offered to non-professional investors in France. The AMF recommendation can be found here and at the time of this article is available only in French.
This AMF instruction on sustainability disclosures is not only a French affair. There are implications also for foreign funds offered in France on a crossborder basis. Conversely, the obligations imposed by the AMF recommendation on sustainability disclosures will not be applicable to French funds offered exclusively outside of France.
The aim of this post is to briefly describe the rationale for the AMF instruction and its relation with the current measures at European level, along with some other considerations on what it means for crossborder distribution of funds in France.
The Backdrop to the Recommendation and its relation with European Measures
We already wrote about the recent introduction at European level of the so called Disclosure Regulation. The recent AMF instruction is issued within this context. The AMF is now taking its formal position in sustaining the existing dynamics, converging at European level, to establish a level playing field on sustainability disclosures to investors. Of course, the move of the AMF with this official recommendation instigates some genuine questions. In first instance, we cannot help but notice the timing of this recommendation with regards to the one of the EU second level regulation accompanying the main Disclosure Regulation. This is expected to be released some time by the end of 2020. And whilst the EU second level regulation will provide the granularity of details required for market participants to be able to comply with the sustainability disclosure requirements, the AMF recommendation already goes as far as proposing some wording to be introduced in marketing communication of foreign funds offered in France. Also, there is a timeline for introduction of these changes and mandatory compliance with the provisions of the recommendation.
From a mere technical standpoint, the instrument adopted at EU level to deal with sustainability disclosures has been the one of the regulation. This was done to leave little to no room for gold plating or local additional measures. Whilst we like that the AMF wants to spearhead the movement and release ahead of time an official interpretation of certain aspects related to sustainability disclosures, we argue that it would have been a preferred option that no requirements on commercial and marketing communications be imposed before the second level regulation was in place, especially for foreign funds distributed cross border into France. The fact that the contents of the recommendation will adjust on the basis of the EU second level regulation will likely mean potential increased costs of compliance in case of mismatches between the principles of the recommendation and the provisions contained under the EU second level regulation.
The Risks of Sustainability Disclosure and the Proportionality Principle
The approach adopted by the AMF with this recommendation is based on a simple yet very important consideration. Sustainable finance developed very fast in the recent years. Various different strategies have been introduced recently as well as various management approaches. The ecosystem of sustainable finance remains nevertheless still not mature enough and no best practices are available yet. This scenario poses risks especially for non-professional investors. For this type of investors, in fact, the risk of exposure to greenwashing practices remains highly likely, where marketing communications might emphasise in a disproportionate manner certain specific features, which don’t have in reality a significant and measurable impact on the strategy of the products.
At the core of the AFM recommendation there are general principles developed in order to ensure that communication to non-professional investors on the use of non-financial management techniques is fair, clear and not misleading. The recommendation enucleates various positions in order to define standards for the use of the reference to such non-financial management techniques in communications to non-professional investors. Accordingly, there is emphasis on the principle of the engagement of these techniques in the management of a fund, in a way that is significant and also measurable. Only where that is the case the reference to the extra financial criteria can be made a central element of the communication to investors and be contained in the name of a product, for instance. In all other cases, extra financial criteria can be part of the communications made to investors, without being a central element thereof.
Implications for cross border distribution in France
The interpretation contained in the AMF paper with regards to foreign funds distributed cross border in France is based on years of experience of the French regulator in dealing with the marketing and promotional material prepared by those foreign funds. As we know, all marketing and promotional communications to be used when distributing cross border foreign funds to retail investors in France will have to be submitted for prior approval to the AMF, before these can be disseminated to the public.
As part of the recommendation and with reference to those foreign funds marketed cross border, where the reference to non-financial techniques is a central element of the communication, the AMF seems to have adopted a very strict approach based on a set presumption. Given that it has been very frequent for the AMF to have requested modification in the past of marketing material of foreign funds which make of non-financial techniques a central element of the communication, the AMF seems to have elected the use of certain disclaimers as a solution in order to mitigate the risk of misleading communications. Accordingly, marketing material of those foreign funds will have to contain a disclaimer to the extent that the reference to the non-financial management techniques is considered disproportionate with regards to the expectations of the AMF when those foreign funds are not in a position to comply with the positions contained in the recommendation.
Sustainable finance is here to stay and will increasingly become the choice of retail investors, following the success being experienced with more sophisticated and institutional investors. As the market matures, it is likely that different countries will take a more authentic approach on certain issues, which might represent some additional and transparent barriers to cross border distribution. Successful managers should keep the pulse of the situation across the different markets in EU where they distribute their funds by engaging with their distribution network more organically on these issues.