SFDR

What is it? 

The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation that aims to increase transparency and prevent greenwashing in sustainable finance with specific ESG disclosure requirements.The SFDR is closely linked to the EU Taxonomy Regulation, which sets out a classification system for environmentally sustainable economic activities. 

It is focused on achieving the following objectives: 

• Standardised reporting, in which financial market participants, such as asset managers, insurance companies and banks, disclose information about how they integrate these ESG factors into their investment decisions;

• Promote transparency in the financial market, offering investors clear insights into ESG factors, promoting better-informed decision making;

• Avoid greenwashing by establishing a clear standard set and avoiding that financial products are presented as more environmentally conscious than they are. 

Who needs to comply

The SFDR applies to a wide range of financial market participants, including: 

• Investment managers/advisers from outside the EU if they offer products in the European Market or oversee EU assets and funds; 

• Investment firms such as asset managers, hedge funds, and investment banks; 

• Insurance companies such as  insurance companies, property and casualty insurers, and pension funds; 

• Banks, such as retail banks, investment banks, and central banks;

• Larger FMPs (with over 500 employees) and those considering the Principal Adverse Impacts (PAIs) must publish PAI statements annually;

• Smaller FMPs (with fewer than 500 employees) can either adhere to the 'Comply or Explain' principle or detail why they are not complying;

• Financial advisers such as investment advisors, financial planners, and brokers;

In addition, other financial market participants such as exchanges, clearinghouses, and market infrastructure providers, and certain financial products such as investment funds, insurance-based investment products and other financial products, such as structured products, derivatives, and securitised products.

There are two levels of disclosure: 

Organisation level reporting in which institutions should disclose the ESG risks associated with their investment processes and how they have integrated the ESG factors into their remuneration policies. 

Fund/product level reporting: 

• Article 6 disclosures: These apply to all funds regardless of whether they are marketed as sustainable. These products must disclose information about the principal risks integrated into product investment decisions, as well as the likely impacts of these risks on the returns of the financial products.

• Article 8 disclosures: These apply to funds that are marketed as sustainable These products must disclose how they meet the sustainability objectives, and how they benchmark themselves against other products that promote similar characteristics. 

• Article 9 disclosures: refer to funds that have sustainable investment as their primary objective and which should disclose their sustainability objectives, how these are aligned with these objectives and how and why the designated index might differ from a broad market index.

These disclosures should be made at an entity level, on their websites, showcasing their approach to integrating sustainability risk and how ESG factors affect their decision making processes; they should also be disclosed at a product level, either pre contractual or in the company’s annual report, and should be public at all times.