Q&A: The EU’s SFDR sustainability rules
What is SFDR?
One of the difficulties faced by responsible investors has been a lack of common rules, data and language to define strategies and outcomes. The Sustainable Finance Disclosure Regulation (SFDR) is the European Union’s (EU) effort to solve at least part of that problem.
What products are affected?
The SFDR rules affect products managed by EU entities. Their impact is greater for those strategies which seek to apply ESG criteria as part of the portfolio decision-making process.
Has SFDR been fully implemented?
Although the SFDR was first published in November 2019, the roll out of the regulation has been hampered by delays as the EU addressed concerns from a variety of stakeholders. SFDR guidance on the classification of financial products took effect in March 2021, and firms have been expected to collect data on so-called principal adverse impacts (PAIs) since June 2021. However, the final regulatory technical standards – known as SFDR Level II – were only adopted in April 2022 and have only applied to financial firms since January 2023.
What kind of information will be published?
All products will need some form of disclosure under the new rules. Even strategies that do not claim any direct ESG integration will have to describe to clients how sustainability risks are incorporated into decision making, and how those risks might affect financial outcomes (Article 6 products).
Are there any other changes?
Another SFDR disclosure requirement involves larger asset management firms publishing on their websites the potential negative environmental and social impacts of all their holdings, as well as details of their policies to mitigate those negative impacts, including engagement policies.
Why has this happened now?
The growth of the responsible investment industry has accelerated in recent years and the amount of measurable and verifiable data has increased alongside it.
Disclaimer
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