Sustainable Finance Disclosure Regulation (SFDR) is also known as the ESG Disclosure Regulation, and the kickstarts the regulator’s initiative to make ESG into hard law. It will apply to EU and other relevant financial market participants (FMIs) such as UCITS management companies and AIFMs from 10 March 2021. Any investment manager based in or outside the UK, which markets into the EU, will be required to comply, although there are some ways in which it could apply to non-EU firms.
In this month’s newsletter, we summarise the key requirements under SFDR Level 1 Regulation as you finalise your implementation for 10 March.
Product categorisation – There are three categories of a product under SFDR:
- Article 9 products – Financial products that have a sustainable investment as their primary objective. Products in this category may have a specific ESG objective, such as mitigating climate change risk or having a broader exposure to ESG themes.
- Article 8 products – Products that promote an environmental or social characteristic. These are products that do not have a sustainable investment as their objective but take ESG criteria into account in the investment process as one factor among many.
- Article 6 products – Out of scope products. These are products that do not purport to promote any ESG objective.
Website Disclosures – The information, which FMIs and advisers including must disclose on their websites includes:
- Sustainability risks – Policies on the integration of sustainability risks in the investment decision-making process.
- Principle adverse impacts (PAI) – PAI are negative, material, or likely to be material effects on sustainability factors. The disclosure will include information on the due diligence process and policies used to consider the PAI of investment decisions on sustainability factors.
- A remuneration policy is consistent with the integration of sustainability risks.
- For financial products which promote ESG characteristics: a description of the relevant ESG characteristics; information on the methodologies used to assess, measure and monitor the ESG characteristics and where an index is used as a reference benchmark for ESG characteristics, whether the index is consistent with those objectives.
Pre-contractual Disclosures – For AIFs and UCITS, firms must include some disclosures in their prospectuses.
Periodic Reports – Disclosure requirements in periodic reports (annual accounts) will also be required for financial products, which promote ESG characteristics.
Implementation of SFDR will require GRC professionals to work with other teams at their firms, such as Portfolio Managers. Research and Legal.