The Sustainable Finance Disclosure Regulation (“SFDR”) will come into force on 10 March 2021 in the EU – two months to go. The SFDR will have direct effect in the Netherlands.
High level impacts
SFDR requires all AIFMs, UCITS management companies, and MiFID firms providing the service of portfolio management to make certain pre-contractual, website and periodic disclosures on various sustainable investment issues.
AIFMs that make use of the light regime (sub threshold regime) have not been excluded from the scope of the SFDR, but there is uncertainty as to whether the requirements under the SFDR were indeed meant to apply to these entities as well. The Dutch Authority for Financial Markets ("AFM") has, together with other European regulators, requested the European Commission to clarify this issue. Until the European Commission has confirmed the scope of the SFDR, Dutch AIFMs that make use of the light regime need to comply with the requirements under the SFDR.
At a high level the requirements include:
- For all relevant entities: how the entity integrates sustainability risks into the investment decision making process, how the entity takes account of the principal adverse impacts of investment decisions on sustainability factors (on a comply or explain basis) and how their remuneration policies are consistent with the integration of sustainability risks.
- For all relevant products: All products will need to disclose the likely impacts of sustainability risks on the returns of the product (or explain why such risks are not considered relevant). If the relevant entity is complying with the principal adverse impacts requirements, each of that entity’s products will also need to disclose whether and how it considers the principal adverse impacts on sustainability factors. Note that all of your products are captured – not only those with an ESG focus.
- For ESG focussed products: products that promote environmental or social factors (Article 8) or have a sustainability objective (Article 9) have additional disclosures to be made, following detailed frameworks that are not yet available.
Three key points to note now
- Take into account the regulator's guidance. The AFM has issued specific guidance for AIFMs, UCITS management companies, and MiFID firms on how to implement new legislation and regulations in the field of sustainability, including but not limited to the SFDR.
- Don’t underestimate the preparation involved. Compliance with SFDR is a time intensive task, bespoke to every entity and product. Although framed as requiring only disclosures, it in practice requires firms to make strategic business and policy decisions – which will then need to be disclosed. It is not possible simply to include a standard disclosure in your prospectuses or PPMs or on your websites.
- Be aware of the detailed frameworks that will follow. The SFDR disclosures outlined above are supplemented by more detailed measures, which set out in much greater detail what firms need to disclose at both an entity and a product level. These include a number of highly detailed and scientific metrics, many of which would have been impossible to obtain and disclose by 10 March 2021. Following industry feedback, the European Commission has confirmed that compliance with these more onerous requirements will be delayed – probably until January 2022. Although this is good news for now, it does not remove the issue entirely. The main requirements will still apply and so these will need to be dealt with on a best efforts, principles based approach.
How we can help
We are advising many of our clients across Europe on the implementation of SFDR and have an expert team across all fund types and asset classes. We can assist in many ways depending on your internal needs and resourcing, including:
- Assisting with scoping out how your firm and products will be affected by SFDR, including analysis for determining whether a particular product will fall under Article 8 or Article 9;
- Providing detailed frameworks for compliance with the various disclosures;
- Assisting with the drafting of the relevant policies and disclosures;
- General support with the business in understanding the far reaching effects of SFDR and identifying any gaps in our existing ESG materials.