Over recent years the EU made a significant political decision to establish a package of Environmental, Social and Governance ("ESG") initiatives and legislation to move Europe toward several Sustainability goals.
Within the package of initiatives is the sustainability related disclosure in the financial services sector Regulation ("SFDR"). This requires financial actors to consider two main issues:
- disclosure of the principal adverse sustainability impacts (doing harm); and
- quantification of the beneficial investment results.
The SFDR captures within it's scope nearly all firms in the financial sector AIFM, UCITS, MiFID as well as Solvency II and IDD firm and crucially the products they manage or promote SFDR becomes effective on 10 March 2021. This despite the industry asking for more time to implement such an ambitious goal.
A. What do you need to do by the 10 March 2021?
By 10 March 2021, the SFDR requires certain disclosures to be made on websites and in pre-contractual documents e.g. Private Placement Memoranda.
For financial services firms, collectively called "financial market participants" within SFDR, the decision needs to be made to either comply with the principal adverse sustainability impacts ("PASI") of the investment or explain why not and include this in pre-contractual disclosures.
B. What are the new disclosures?
There are new policies on Remuneration, Risk Management, Portfolio Management and disclose relevant components of these on the firm's website.
For financial products the decision needs to be made if the financial product wishes to be categorised as either:
- a sustainable investment (Article 9 of SFDR);
- a partially sustainable investment (Article 8 of SFDR); or
- neither, in which case disclosure on the sustainability risks and possible impact to financial returns should be disclosed.
The reporting on the data gathered becomes effective by 30 June 2021 and year end 2021.
These decision points will need both short term and longer-term strategic consideration. It is estimated that investment flows into ESG investments will exceed those into non-sustainable investments in the coming years. Further, there is interaction between market participants and the financial products they advise and market. It is difficult to imagine an Article 9 product being managed or marketed by a financial services firm that has decided not to adopt measurement and disclosure of the principal adverse sustainability impacts. Equally, it will prove difficult for a financial market participant to quantify the PASI if the data is not available at product level.
C. Next Steps
The industry is still waiting for the Regulatory Technical Standards which provide the framework for the reporting dissected into 50 categories a draft is available here: https://www.esma.europa.eu/document/joint-esa-consultation-esg-disclosures
If you are not already well advanced with this project, there's no time to lose as 10 March 2021 is less than 5 weeks away.
Originally published February 2, 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.