Sustainable Finance Disclosures Regulation (SFDR) Phiroza Katrak

Some weeks ago my colleague Greg Readings wrote about the United Nations’ Sustainable Development Goals (SDGs) which investors often see as one or more of 17 colourful pictograms in promotional or reporting material which seek to highlight the environmental, social and governance (ESG) credentials of the product.

There we go – ESG, SDG, two of several acronyms and terms used when exploring or marketing a variety of thematic funds or products.  There is now another inhabiting this space: SFDR – the Sustainable Finance Disclosures Regulation, which is a key pillar of the European Union’s ESG initiatives. 

From March 2021 financial market participants including asset managers in the EU have to comply with the high-level principles-based ‘Level 1’ requirements of SFDR.  This regulation applies at both, fund manager and product level.

There has been mixed reaction to SFDR, but there is one thing many agree on and that is it will inhibit companies, including asset managers, from greenwashing their portfolios and products and instead provide more transparency over the stated green/clean/sustainable claims and the extent to which these goals are being achieved.

SFDR requires UCITS fund management companies or investment firms providing portfolio management to consider and acknowledge sustainability risks inherent in their decision-making process even if their products or portfolios don’t have an ESG or sustainability tilt.  Importantly, the regulation also sets specific requirements for funds which are labelled or promoted as ESG or carbon reduction or sustainable investment funds. 

The UK has opted not to implement SFDR into UK legislation following the end of the Brexit transition period, but you may find references to it as the regulation has implications for non-EU asset managers if they market their funds or products in the EU. So, if you see these references in a prospectus or on the company’s website, this is what they signify:

  • Article 6 funds: those which are not promoted as having ESG factors or objectives – these funds are nevertheless required to have disclosures on the integration of sustainability risks in the investment process and the possible impact on returns.
  • Article 8 funds: those that promote certain environmental or social characteristics but do not have these as the overarching objective.
  • Article 9 funds: those which specifically have sustainable investment or carbon emission reduction as their stated objective.

Article 8 and 9 funds will also have to require data and reporting to back up their assertions.

SFDR is not to be confused with Task Force on Climate-related Financial Disclosures (TCFD) reporting.  That is another acronym, and if you feel there’s probably enough of them already in this one Insight article, I empathise.  For the curious, TCFD is the framework for public companies for effective reporting on their climate-related risks and opportunities and the potential impact on their organisation’s business, strategy and financial planning.

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