Sustainable Finance Disclosure Regulation (SFDR)
2015 was a defining year in the fight against climate change.
On 25 September 2015 the UN adopted the 2030 Agenda for Sustainable Development which placed the UN Sustainable Development Goals (SDGs) at its core. This was followed on 12 December 2015 by the Paris Agreement a legally binding international treaty aiming to limit global warming to 1.5 degrees Celsius compared to pre-industrial levels signed by 196 parties.
As a result the European Supervisory Authorities imposed SFDR which went live on 10 March 2021.
At a time when Environmental Social & Governance (ESG) products are becoming increasingly sought-after by both professional and retail investors alike (2020 alone saw the inflow of capital into ESG products quadruple according to an FT article) SFDR seeks to satisfy the appetite for greater clarity and transparency at both entity and product levels.
While the UK government has not opted to enshrine the SFDR into UK law (at this time) the EU regulation will still have a verifiable impact upon UK firms and products that market into the EU or manage EU-based funds.
The first part of SFDR dictates that all Financial Market Participants (those manufacturing financial products) and Financial Advisors (those offering investment or insurance advice) fully integrate systemic sustainability risks into their due diligence and research processes regardless of their current ESG credentials.
Therefore from 10 March 2021:
- All relevant entities must disclose on their websites how sustainability risk is integrated into their policies (with focus on remuneration policies)
- Financial Market Participants (FMPs) must publish a statement on their website explaining whether consideration is given to the principal adverse impact of investment decisions on sustainability factors (on a 'comply or explain' basis)
- At a product level statements must include whether the product integrates sustainability risk in pre-contractual disclosure information (also on a 'comply or explain' basis)
FMPs or parent undertakings of FMPs with over 500 employees must also comply with the above by 30 June 2021.
Where products already consider sustainability risk any enhanced disclosures as outlined by Article 8 (products that promote an environmental or social characteristic) or Article 9 (products that have sustainable investment as their objective) must be complied with. For those products that do not take sustainability risk into account the option is there to 'explain' should they wish to do so.
From 1 January 2022 all FMPs and Financial Advisors must be in compliance with the Regulatory Technical Standards (RTS).
Part of the PraxisIFM Group International Fund Management Limited (IFM) a Non-EU AIFM provides AIFM services to a range of strategies and successfully markets AIFs it manages throughout the EEA.
As a result IFM has kept abreast of this fast-evolving regulatory framework to ensure it and the AIFs it manages are compliant with SFDR.
Given a number of its clients 'promote' environmental or social characteristics IFM has needed to ensure it fully complies with SFDR to the extent clients are classified under Article 8.
In an article on Guernsey Finance's website on 9 March the promotional agency said as SFDR reporting was not due for another two years and with the conditions attached to it 'it is going to be interesting to see if any Guernsey managers feel the need to comply at that point'. At IFM we could consider ourselves to be at the forefront in complying with SFDR from 10 March 2021.
To find out more about our Sustainability Risk Policy visit the IFM website or contact Shaun.
This article constitutes neither professional advice nor a binding offer by us to provide professional services . Any engagement in respect of our professional services is subject to our standard terms and conditions of business and the provision of all necessary due diligence.