EU regulators have warned the real estate fund management industry against using Sustainable Finance Disclosure Regulation (SFDR) as a fund labelling system, while also clarifying Article 8 and 9 requirements.

The European Securities and Markets Authority (ESMA) has told the European Association for Investors in Non-Listed Real Estate (INREV) that Article 8 and Article 9 disclosure requirements are “not product labels”, according to a new briefing paper.

The paper, published today by the association representing investors and managers worth €2.8trn, says “ESMA highlights a widespread misunderstanding in the market about the SFDR articles”.

It also clarifies whether real estate investment funds that seek to improve the sustainable performance of properties can go beyond Article 8 requirements (promoting environment or social characteristics) and be applicable to Article 9 (having sustainable investment as their objectives).

ESMA told INREV that real estate funds that acquire and upgrade poor performing buildings would not meet Article 9 requirements at the outset.

“Funds that meet Article 9 requirements must be investing fully in investments that already qualify as sustainable,” the paper says. “Where a ‘stranded-to-green’ fund does not initially meet Article 9 requirements, it might be disclosed under Article 8 and under Article 9 only when all the assets in the portfolio are sustainable.”

The clarification could lead to disappointment among fund managers looking to market environmental-impact real estate strategies.

Constantin Sorlescu, director of professional standards at INREV, told IPE Real Assets: “SFDR is undoubtedly game-changing. However, Article 8 and Article 9 needed to be more clearly understood within the real estate investment industry.

“Both articles are nuanced and quite distinct from one another. But neither was ever supposed to be used as a product label, as some had previously thought. They are, in fact, disclosure requirements.

“Article 8 is designed to capture a vast array of investment vehicles. Article 9, on the other hand, is very limited. It’s not meant to be an impact label and even an active ‘stranded-to-green’ redevelopment strategy won’t initially meet the requirements currently set out within the article.”

Sorlescu added: “We welcome ESMA’s recent clarification of Articles 8 and 9. It reflects a broader opportunity for INREV to maintain the dialogue with ESMA and to continue to provide input on behalf of the industry so that, together, we can address the very real concerns of market participants. These concerns matter because they are firmly rooted in the practical realities and complexities of real estate investing.”

INREV contacted ESMA earlier this year to clarify several questions around SFDR, including the question of how to disclose energy-efficiency information for real estate assets when there are different energy-performance certificates (EPCs) used across Europe and locations where EPCs are not available.

“ESMA acknowledges lack of data is an issue requiring a detailed consideration”, the paper says. INREV is considering formally submitting question to the regulatory authorities to clarify the issue.

ESMA did confirm that SFDR applies to real estate debt funds in the same way to real estate equity funds, clarifying that the regulation is “instrument-neutral and is intended to be based on the underlying asset exposures”.

INREV plans to “work further with the industry to address practical considerations and challenges related to implementations of the SFDR and the EU Taxonomy”.

The paper says: “We plan to identify other important and urgent questions considered by the industry and formally submit them for the [European supervisory authorities] in a Q&A where we can receive non-binding opinion. We will share the response we receive with our members and the broader industry in further SFDR-related papers.”