Reporting to GRESB as an Article 6 SFDR fund doesn't trigger penalties - but setting GRESB targets may open 'can of worms'

Sustainability SFDR Meeting: Key Takeaways

December 21, 2021


Reporting to GRESB does not automatically trigger fines for vehicles registered as Article 6 under Europe’s new sustainability disclosure rules – but setting targets and objectives as part of the GRESB benchmark may open up a “can of worms”, NAREIM members heard this week.


During a special NAREIM session focused on the Sustainable Finance Disclosure Regulation (SFDR) on December 20, members discussed how they were tackling Europe’s latest ESG rules – and how it was impacting US marketing regulations and reporting to industry benchmark’s such as GRESB.


Members were told that, currently, a majority of real estate investment managers were classing their funds/vehicles as Article 6 products, whereby fund-level ESG efforts were focused on risk mitigation, value creation and helping firms remain competitive in the marketplace.


While many firms were expecting to upgrade their funds/vehicles to an Article 8 classification in the near future, most were waiting for more clarification from the European Commission before moving away from Article 6 classification.


What about GRESB?

  • However, NAREIM members asked if the mere act of reporting to GRESB while still being an Article 6-classified vehicle would result in an infringement of SFDR – together with the potential for fines.

  • Members were told the most critical thing was to seek legal counsel advice, but that typically reporting to GRESB alone would not trigger infringement action.


Watch out for T1:1

  • The key section to watch for was T1.1 in the GRESB benchmark, the meeting heard, which asked for concrete targets for the reporting entity. “This is one to be very careful of,” an ESG consultant told the NAREIM members. “It’s potentially a can of worms and one that needs to be discussed with legal counsel.”


More areas to get legal advice on:

  • Start documenting the processes around ESG to be able to answer European investors’ questions on SFDR, particularly how ESG is being incorporated into risk management, renumeration and due diligence

  • Article 6 funds/vehicles should not have net zero strategies or commitments, the meeting heard

  • Be prepared to explain your position to investors, such as why you’re an Article 6 vehicle. For example, the meeting heard, you could explain your plan and approach to investors, together with the vision the firm has to upgrade the vehicle to Article 8, but noting a lack of regulatory clarity that was hindering the strategy.


Download the presentation and attendee list from the meeting by clicking here.


Conflict with SEC marketing rules

NAREIM members also asked if SFDR is in direct conflict with US SEC rules banning marketing of funds to non-accredited investors.


One of the requirements under SFDR at the product-level is the need to publish on a website, disclosures about sustainable investments and the monitoring of performance. Members were advised that a website was typically also being seen as an encrypted investor portal, thereby retaining performance disclosures to accredited investors only.


European LPs want Article 8 classifications

NAREIM members heard that to raise capital from European investors, funds and vehicles will increasingly have to be classified as Article 8 under SFDR rules. “European investors are raising questions already [about SFDR] and there is an expectation that investors will look at or favor Article 8 or 9 funds [in the future],” said an ESG consultant.


What are the Articles under SFDR?

There are three Articles of note that relate to product or fund/vehicle classification:

  • Article 6: Vehicles that don’t integrate sustainability considerations and/or don’t consider the sustainability risks relevant, or don’t meet Article 8 or 9 criteria

  • Article 8: Vehicles that are promoting environmental or social characteristics and have quantifiable objectives but don’t necessarily have sustainable investing as their core objective

  • Article 9: Funds that have sustainable investment as their core objective, meaning they are investing in companies that clearly show positive sustainable outcomes as part of their business model.

  • SFDR rules apply to products and vehicles that raise capital from European investors or invest in the EU.


Download the presentation and attendee list from the meeting by clicking here.



Note, the above are takeaways from the NAREIM Sustainability meeting, held on December 20, 2021, and should not be taken as legal advice. NAREIM members and readers of this newsletter and website should contact their attorney to obtain advice with respect to any particular legal matter.