Sustainable Finance Disclosure Regulation (SFDR)

The Sustainable Finance Disclosure Regulation (“SFDR”) is an EU Regulation that aims to further develop investor disclosures on sustainability and sustainable financial products and harmonize the rules on this subject across the EU. The aim is to improve the ability of investors, both corporate and individual, to assess financial products on environmental and social characteristics and to better compare different financial products by increasing transparency on sustainability.

The provisions under the SFDR apply to “financial market participants” (in SFDR terminology). This term includes banks, investment funds, pension funds, asset managers and life insurers (to the extent they offer insurance-related investment products). The SFDR also applies to financial advisors with three or more employees. Instead of a “financial market participant”, we refer to a “fund” for short in this white paper.

The disclosure requirements of funds can be broadly divided into four topics:

1. Information on the consideration of adverse impacts on sustainability in investment policy
   A fund, regardless of whether it offers a sustainable financial product or not, should always post a statement on its website, whether it considers adverse impact on sustainability in investment decisions, and if so to what extent. Adverse impact should be measured against a set of sustainability factors and should be disclosed both at company and product level. If the fund does not take adverse impact into account it is required to explain why (the “comply-or-explain principle”).
2. Information about the policies on sustainability risks, and the integration of these risks into remuneration policies
   Every fund that falls within the scope of the SFDR is required to disclose information about its policies on integrating sustainability risks into its business and remuneration policies on its website.
3. Information on the integration of sustainability risks
   This disclosure requirement applies to all funds, including those that do not offer sustainable financial products. A fund is required to disclose a description of how sustainability risks are part of the decision-making process around investment decisions and the effect of sustainability risks on the return of the financial product in the prospectus. If the fund expects that sustainability risks do not play a role in the decision-making process, then the before mentioned “comply-or-explain principle” is applicable.
4. Information about the sustainable characteristics or sustainable objective of “sustainable” financial products
   In the event that a fund offers a sustainable financial product to investors, it will be necessary to consider whether that product has environmental and/or social characteristics (Article 8 SFDR) or a sustainable investment as objective (Article 9 SFDR). These two type of sustainable products are referred to as a “light green product” and a “dark green product” or as an Article 8 fund and an Article 9 fund. The classification of a product is important as it determines the extent of the reporting requirements. This information is then disclosed in the prospectus and in the product information on the website, as well as on a periodic basis in a report as designated under Article 11 SFDR.

A fund that does not offer a product with a sustainable objective or without environmental and/or social characteristics is referred to as an Article 6 fund, since each fund is required to disclose information on the integration of sustainability risks under this Article 6 SFDR. The fund then offers a so-called “gray product”.

AFM investigation

The Dutch Authority for the Financial Markets (“AFM”) conducted an investigation in 2021 concerning the compliance of funds with the SFDR. The results of this investigation reflect that there is often still ambiguity as to whether a fund offers an Article 8 or an Article 9 product. The products of a number of investment funds seemed to have been wrongly classified as either a product with environmental and/or social characteristics or with a sustainable objective. According to the AFM, fund managers are therefore recommended to critically assess the classification of the product they offer.

Relationship with Taxonomy

The term “sustainable” is also defined for the SFDR by the Taxonomy. Funds with “sustainable” financial products, i.e. products with environmental and/or social characteristics or with a sustainable objective, must report on the extent to which they contribute to one or more sustainable objectives from the Taxonomy. In addition, they need to indicate the extent to which the “Do No Significant Harm” principle is observed. Please find more on the Taxonomy Regulation below in Chapter 3.

Regulatory Technical Standards

As of 1 January 2023, the Regulatory Technical Standards (“RTS”) apply, which set out the disclosure requirements under the SFDR in more concrete terms. The RTS contain various templates in which information is to be disclosed. The AFM launched a new investigation regarding compliance with the SFDR after the RTS came into force. This investigation is ongoing at the time of writing of this whitepaper. The first findings are expected to be published early 2024.

As indicated above, each fund must disclose information via its website whether, and if so to what extent, the fund considers adverse impacts on sustainability when making investment decisions. This information is disclosed, for example, through Table 1 of the RTS, also known as the Principal Adverse Impact (PAI) statement.

Further entity-level disclosure requirements are included in Annex I of the RTS. These also include specific indicators for real estate.

Managers of Article 8 and Article 9 funds must elaborate on the pre-contractual information they provide to investors using Annex II and Annex III, and they must use Annex IV and Annex V for (the content of) periodic reporting.