Goal of the Sustainable Finance Disclosure Regulation (SFDR)
The primary goal of the SFDR is to enhance sustainability investment practices and improve transparency within the financial industry. This regulation aims to standardise the measurement of environmental, social, and governance (ESG) factors, simplifying the process for both retail and institutional investors in the EU to comprehend, compare, and track investment funds from a sustainability perspective.
Scope
The SFDR applies to a wide range of entities in the European financial sector, including financial market participants such as asset managers, investment firms, insurance companies and pension funds, as well as financial advisers who provide investment advice. The SFDR also covers various financial products, including investment funds and insurance-based investment products.
Implementation Timeline and Compliance Requirements
The SFDR came into force on March 10th, 2021, marking the beginning of mandatory disclosures for all entities within its scope. These entities are required to fully comply with the SFDR disclosure obligations by January 1st, 2023. Regulatory authorities within each EU member state are responsible for overseeing compliance and enforcing the SFDR. Failure to comply can result in significant penalties, which underscores the importance of meeting the established disclosure requirements to maintain credibility and trust with investors.
Key Definitions
- Sustainability risk,
An environmental, social or governance event or condition that has the potential to negatively impact the value of an investment.
- Sustainable investment,
Investments made in economic activities that contribute to an environmental objective, such as climate change mitigation, while also ensuring that those activities do not harm other environmental or social goals.
- Principal adverse impacts (PAI) of investment decisions on sustainability factors,
Negative effects that investment decisions or advice may have on sustainability factors, including ESG aspects.
Disclosure Framework
The SFDR establishes a disclosure framework that is split into entity-level disclosures, which focus on the overall sustainability practices and policies, and product-level disclosures, which provide specific information about sustainability characteristics and risks associated with individual financial products.
Entity-Level Disclosures
Under the SFDR, entity-level disclosures require comprehensive information about sustainability practices, policies, and risk management strategies. These disclosures encompass how sustainability risks are integrated into the overall investment decision-making process, the PAI of investment decisions on ESG factors, and commitments to sustainable investment objectives. By mandating these disclosures, the SFDR aims to enhance transparency and accountability, allowing investors to better assess the sustainability practices of the entities they engage with.
Product-Level Disclosures
Product-level disclosures are categorised under Articles 6, 8 and 9, based on the extent to which they integrate sustainability risks and objectives. These disclosures are designed to provide transparency regarding the sustainability characteristics of the financial products, classifying them based on their ESG objectives, and ensuring that investors have the information they need to make informed decisions.
Article 6 – Products with No Sustainability Focus
Article 6 relates to financial products that do not promote any environmental or social characteristics and do not have sustainable investment objectives. These products are required to disclose how sustainability risks are integrated into the investment decision-making process, allowing investors to understand the potential impacts of these risks on performance.
Article 8 – Products Promoting Environmental or Social Characteristics
Article 8 covers financial products that promote environmental or social characteristics but do not have a sustainable investment objective. These products must provide clear information about how these characteristics are achieved, including any relevant methodologies, metrics and underlying investments, enabling investors to assess their alignment with sustainability goals.
Article 9 – Products with Sustainable Investment Objectives
Article 9 applies to financial products that specifically target sustainable investment objectives. These products must disclose their investment strategies and how they aim to achieve positive environmental or social impacts. Additionally, they are required to demonstrate that their investments meet certain sustainability criteria and do not significantly harm other environmental or social objectives.
How Can We Help
Compliance with the SFDR is essential for maintaining transparency and building trust with investors. We offer tailored support, including an SFDR Gap Analysis that covers both the SFDR and the Delegated Regulation, helping you identify compliance gaps effectively.
Mark Wirth
Partner
