Sustainable Finance Disclosure Regulation

29 June 2023

The focus on sustainable investment and transparency about the environmental, social and governmental (‘ESG’) impact of investments is increasing. To address this, the European Sustainable Finance Disclosure Regulation (‘SFDR’) has been introduced. This regulation is part of the EU Action Plan on Financing Sustainable Growth and imposes mandatory ESG disclosure obligations in the financial services sector. The implementation deadline for the obligations that follow from the SFDR expires on 30 June 2023.

To whom does the SFDR apply? What obligations follow from the SFDR? And how should these obligations be implemented? These questions will be answered (briefly) in this blog post.

Scope of application

The SFDR has direct effect throughout the EU and applies to two types of financial service providers:

  1. financial market participants, and
  2. financial advisers.

Financial market participants are companies that produce and sell financial goods and provide portfolio management services. These include investment firms, pension funds, asset managers and life insurers (to the extent that they offer insurance-related investment products). Financial advisers are parties with three or more employees providing investment or insurance advice on insurance-related investment products.

Although the SFDR primarily applies to firms operating in the EU, non-EU firms will be indirectly affected through its EU subsidiaries, provision of services in the EU and market pressures. For example, investment managers or advisers that operate outside the EU but advertise their products to customers in the EU also fall within the scope of the SFDR.

Transparency obligations

Different transparency obligations apply to each type of financial services provider, which are explained in general terms below. These obligations are related both Sustainability Risks and Principal Adverse Impacts (‘PAI’). Sustainability Risks refer to ESG aspects that could cause an actual or a potential material negative impact on the value of an investment. PAI refers to any negative effect that investment decisions or advice could have on sustainability factors.

First, the obligations for financial market participants will be discussed, after which the obligations for financial advisers follow. These obligations differ per financial product offered and should be implemented through specific technical standards. Mandatory transparency templates follow from the SFDR, which are subject to content, methodology and presentation requirements.

Please note: a simplified explanation follows, for detailed advice on the relevant obligations for your company, we recommend you contact our experts.

Obligations for financial market participants:

  1. Publication of PAI statement via website: A statement must be posted on the website showing whether the PAI of investment decisions on sustainability are taken into account. If this is the case, the statement should also make clear how due diligence policies are aligned with this. The size, nature and complexity of activities and products should be taken into account when preparing a PAI statement.
  2. Communication with customers: The main PAI of investment decisions should be measured against sustainability factors and must be communicated to customers. Transparency on these effects should be provided initially with regard to the company and later also with regard to individual sustainable financial products.
  3. Statement when PAI is not taken into account: If the adverse impacts are not taken into account, a statement about this should be published on the website according to the prescribed SFDR guidelines. This statement should also indicate whether and when the adverse impacts are taken into account. Such an adverse statement is allowed only for market participants with fewer than 500 employees.
  4. Publication of conduct guidelines via website: Information should be published on the conduct guidelines for the integration of Sustainability Risks into the investment decision process and remuneration policy.
  5. Pre-contractual Disclosure: pre-contractual information should describe how Sustainability Risks are considered in the decision-making process of investment decisions or advice. In addition, the likely effect of the PAI on the return of the financial product should be explained. If the Sustainability Risks are not expected to play a role, a clear and concise explanation of this is required.
  6. Information on financial products: In Pre-Contractual Disclosures, in product information on the website and through Periodic Disclosures, transparency must be provided on the fulfilment of sustainability features and sustainability objectives of financial products. The extent to which these obligations apply varies by product type:
  • Financial products promoting ESG characteristics (Article 8 SFDR)
  • Financial products that have a sustainable investment objective (Article 9 SFDR)
  • Financial products without promotion of ESG characteristics (Article 6 SFDR)

Periodic Disclosures concerns information on the actual PAI of the previous year. Proof of compliance with the sustainability criteria of the investments promised through Pre-Contractual Disclosures will have to be provided through Periodic Disclosures.

Obligations for financial advisers:

Financial advisers must also publish a PAI statement on their website about whether they consider significant Sustainability Risks in their investment or insurance advice. If this is not already done, they should indicate whether and when they intend to do so. In addition, they should also publish behavioural guidelines on their website.

Why should you take action?

With the approaching deadline of 30 June 2023 and to avoid fines for non-compliance, it is essential for companies in the financial sector to identify and implement the relevant obligations on time. Our experts will be happy to help you identify these obligations.

Also, our partner Treety offers a solution to simplify and generate compliance with SFDR obligations using the official EU templates. Through the Treety Academy, they offer expertise and practical guidance to get you ready for SFDR including the necessary documentation.