Sustainable Finance Disclosure Regulations (SFDR) – deadline approaching

With the Level 1 regulation for SFDR coming into effect on 10 March, we take a look at what the regulation means for fund managers

07 March 2021

On Wednesday 10 March the long-awaited Level 1 Sustainable Finance Disclosure Regulations (SFDR) will finally be implemented, affecting fund groups, pensions providers, discretionary fund managers, financial advisers and other financial services organisations with operations across the European Union.

While by no means the first piece of regulation to look at green, ethical or responsible investing (indeed, the whole area of how this aspect of investing is termed is another matter entirely!), SFDR is perhaps one of the most important pieces of regulation. It makes no secret of its aim to mobilise capital to help combat climate change and was perfectly timed to capitalise on the surge in interest in ESG (Environmental, Social and Governance) investing by ensuring financial services providers disclose the sustainability risks of their products and services.

Transparency underpins the regulations, requiring fund groups to disclose and report on how they integrate considerations of ESG risks into their investment process and if they don’t, then why not.

A note on the UK

The Trade and Co-operation Agreement signed at the end of 2020 between the UK and the EU excluded financial services in its entirety. While there are agreements in principle concerning the future relationship of the respective financial services industries, all signs presently suggest that equivalence is unlikely.

What this means is that the UK is free to pursue its own regulatory path and has already signalled its intention to do so. As a result, the SFDR regulations coming into effect in Europe will not apply to fund groups or advisers in the UK. Instead, the UK government has stated its commitment to ‘match the ambitions’ of SFDR, while also publicising its commitment to align itself with the Task Force on Climate-related Financial Disclosures (TCFD). Given the TCFD concentrates solely on the ‘E’ in ‘ESG’ investing it remains to be seen how UK regulations will tackle social and governance concerns.

What SFDR means

Level 1 SFDR requires organisations that fall within its scope to publish both pre-contractual statements (e.g. in a fund’s prospectus) and disclosure statements on their websites about which of their products fall into three distinct categories. These are:

  • Article 9 funds: those funds which specifically have sustainable goals as their objective (for example investing in companies whose goal it is to reduce carbon emissions)
  • Article 8 funds: those funds that promote ESG characteristics but do not have it as the overarching objective
  • Article 6 funds: funds which are not promoted as having ESG factors or objectives

It is worth noting here that what constitutes a ‘sustainable’ investment is broadly defined by the EU Taxonomy, but there remains some contention about what exactly constitutes an Article 8 or an Article 9 fund. At the time of writing the European Supervisory Authorities (ESAs) are still seeking clarity on some of the finer details in SFDR, while other national authorities (most notably the AMF in France) are setting their own stricter criteria.

Future deadlines

In a sign of how important the regulations are being viewed, the three ESAs have published a statement, along some additional guidance – something they rarely do – for impacted funds, setting out the  timeline for future implementation of the next phases of SFDR, with each requiring more prescription from fund groups. Level 2 will start to be implemented on 1 January 2022 with further disclosure obligations at both a firm and product level, while periodic reporting will be prescribed from January 2023. It is worth noting that data will need to be collected from 10 March as it will be needed for periodic reporting in the future. The ESAs’ joint statement – JC 2021 06 – sets out the timeline in more detail.

How FE fundinfo can help

Over the past few months, we have received many enquiries regarding our ingestion and dissemination of ESG related data and documentation.

To help our clients, we are planning to extend our services to cover publication and dissemination of the following new ESG documents:

  • ESG Reporting (marketing document): a dedicated and more detailed ESG reporting document
  • ESG Disclosure Report (legal document): related to SFDR

We are also now collecting relevant data from fund groups.

With our Report Production services we can help groups produce accurate documents and minimise their compliance risks. Our SFDR and Taxonomy Reports will be updated on a monthly basis to meet new regulatory requirements or to include better and more reliable underlying data.

This allows fund managers to include SFDR disclosures in a single factsheet to meet the Level 1 requirements, including products classified according to Article 8 and Article 9 funds. It is already set up to include the periodic disclosure requirements required from 1 January 2022. The reports also capture all relevant sustainability factors such as environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

Our report production services also allow you to inform your clients about the impact of their investments and their alignment with the Sustainable Development Goals as an internationally accepted framework.

Contact:

Contact us at enquiries@fefundinfo.com for more information on how we can help you grow your assets under management.