The Sustainable Finance Disclosure Regulation (SFDR) looks to create a standard set of disclosures and grow transparency around sustainability risks and adverse sustainability impacts to investment products.
This disclosure requirement covers three main categories:
1. The adverse impacts of investment decisions on sustainability factors
2. The consideration of sustainability risk in an investment process
3. Provision of sustainability information with respect to financial products.
This regulation helps the movement of capital in the European Union (EU) to sustainable actions, while also increasing company disclosure requirements across E,S, and G issues.
The Sustainable Finance Disclosure Regulation (SFDR) requires funds to report on specific PAIs, and classify certain funds according to the following taxonomy:
Article 9: Sustainable investing must be the primary objective of the fund.
Article 8+: Sustainable investing must be the primary objective of some portion of the fund's investments. There is no minimum sustainable investment percentage, but the fund' disclosures are binding at the time of initial investment and throughout the fund's lifetime.
Article 8: Sustainable investing is not the primary objective of the fund, but one aspect of the fund's strategy is investing in companies based on their positive environmental, social, and governance practices.
Article 6: These products do not have sustainable investing requirements, and must claim to use ESG as a binding or material investment factor.
The European Securities and Markets Authority also released Sustainability Preference requirements for advisors to diagnose which sustainable investment criteria their clients care about.
With the adoption of SFDR, the requirement to disclose new principle adverse impact indicators will substantially create more transparency across ESG investing. Though there are two types of disclosures, entity level disclosures which are based on a
comply or explain" principle, and product level disclosure which focuses on how firms achieve their sustainability goals based on reporting specific metrics and disclosed properly.
For firms that consider PAIs on sustainability factors, they have to file disclosures across ESG matters including specific indicators. Overall, there are 14 key indicators split between Climate and other environment indicators, and Social and governance indicators.
Our SFDR solution both helps in collecting and making all companies that have data on PAIs in one location, as well as develop tools and ways for advisors to easily compare and assess client values against these main metrics.