EUROPE: EFAMA Guidance on Responsible Investing Information in the KIID and Post Investment Disclosures

Thursday February 16 2012

Fund Axis would like to draw your attention to a recent European Fund and Asset Management Association (“EFAMA”) publication issuing Guidance on Responsible Investing (“RI”) Information in the KIID and Post Investment Disclosure.

The background for this Guidance is the Position Paper on Responsible Investing adopted by the board of EFAMA in April 2011.  A link to this position report is below;

EFAMA Report on Responsible Investing

Introduction

The genesis of this guidance is that since the position paper on RI noted above was adopted in April 2011 by EFAMA it was concluded that “since investors have different preferences in the field of RI, it is difficult to find universal RI standards, other than transparency:

• in reporting on RI;
• regarding investment processes and selection methods; and
• regarding the composition of investors’ investment portfolios.”

In EFAMA’s view transparency in reporting on RI to investors should take place in the pre‐ and post‐investment phases only for those investment products that are promoted as RI products.

In the pre‐investment phase, the Key Investor Information Document (“KIID”) has been considered the most suitable vehicle to increase transparency. This guidance also suggests how reporting on the RI features of a certain fund can be presented in a standardised way in the KIID, to the benefit of investors’ ability to better compare RI offerings.

1.    Pre-Investment Guidance

The rules on the KIID

According to Regulation, the description of the investment policy should cover essential features (Article 7, Paragraph 1). Apart from the obligatory sections, any additions must meet the requirement that “these elements are necessary to adequately describe the objectives and investment policy” (Article 7, Paragraph 4).

This means that there is not a lot of room in the KIID for elaborate texts on RI policies. The EFAMA working group has therefore produced the following succinct guidance for texts that could be used.

EFAMA Guidance

EFAMA suggests for funds which are marketed as RI funds, the KIID should indicate that the investment policy follows certain RI standards to allow investors to more easily recognise and compare RI offerings. References should also be included for where further details on Responsible Investing can be found.

The guidance also suggests that a brief introductory statement and a reference to the relevant investment method/approach should be included in the KIID. EFAMA suggests that the information should be provided by using a selection drawn from the buildings blocks of the standard wording below (See Table 1). The building blocks between brackets should be selected as appropriate and should be modified to reflect the investment criteria and method employed for the fund. The proposed building blocks shall serve as a guidance but not limit fund managers to use and describe in the KIID other investment methods/approaches. Investment managers may also of course at their own discretion include further and more detailed information into the KIID.

The proposed building blocks are as follows;

 “This fund takes [environmental and/or social and/or governance factors] into consideration by [selecting/excluding/following or engaging/voting] based on [Best in Class approach/Thematic approach/Norms based approach].”

Table 1

It is of course possible to combine certain of these approaches in one product or proposition. Investment style: If the RI is passively implemented via indexing to a specific RI benchmark, the approach taken by this benchmark should be briefly described according to the classification above.

 2.         Post‐Investment Phase Guidance

Objective of the RI reporting in the Post‐Investment Phase

The objective of the RI reporting is to provide information that will allow investors to assess to which extent the RI principles and objectives have been applied during the period.

Reporting format and frequency

The RI reporting may either be included in the financial report of the management entity or the fund, or provided to investors as a separate document. Frequency should be at least annually. For investment funds, relevant documents (KIID, prospectus, Private Placement Memorandum (PPM), SRI Transparency Guidelines) should inform investors about the frequency, nature and format of RI reporting and be made aware as to how this information will be made available to them (mail, email, website, etc.).

Content

For investment funds this may include qualitative comments, quantitative indicators, or a combination of both.

• Quantitative disclosure could be based on Key Performance Indicators (“KPI’s”) representative of Environmental, Social and Governance criteria used in the investment process. This may include ratings, scores and other metrics representative of RI criteria used in the investment process. When used at portfolio level, KPIs should allow comparison of the portfolio against its benchmark over a period of time.

• Qualitative comments could provide a description of the RI characteristics of the portfolio and/or selected holdings. It may also include a description as to how RI criteria have been part of investment decisions and ownership practices (e.g. engagement, proxy voting) over the reporting period.

Fund-Axis welcomes EFAMA’s efforts in providing guidance in the areas of RI reporting in both the KIID and other post-investment disclosure. This allows asset managers to have a benchmark standard to operate from and allows consistency in RI reporting across the European Market which allows investors to digest the RI information that they receive from various sources in a more consistent manner.

If you wish to discuss you RI reporting either in the KIID or the preparation of an RI report for inclusion in the annual financial statements, please don’t hesitate to contact us via email on info@fund-axis.com