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The first SFDR deadline is fast approaching on 10 March: are you ready to comply?

3 March 2021

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The sustainable finance disclosure regulation (SFDR) will impose strict disclosure requirements from 10 March – and substantive action is needed to comply ahead of this deadline

The European Commission has defined an ambitious sustainable roadmap towards Environmental, Social and Corporate Governance (ESG) with the goal of achieving targets agreed at the Paris conference of parties (COP21)* by 2050. One of the significant regulatory changes taking place in the European Union (EU) is the implementation of the sustainable finance disclosure regulation (SFDR) on 10 March 2021, and businesses need to start preparing for it now.

As one of the EU’s sustainable finance regulations, the SFDR aims to increase transparency on sustainability, prevent “greenwashing” and enable comparisons for sustainable investment decisions. From 10 March, the regulation requires financial institutions to evidence sustainability activities on both the entity and product levels.

Although most of the financial market participants (product manufacturers, portfolio managers, AIFMs, UCITS) and financial advisers (both investment and insurance) are under regulatory pressure to comply with the regulation, the SFDR also brings new opportunities in terms of new investment, improved risk management as well as an enhanced dialogue with clients. For many companies, the March deadline marks just the start of their sustainable finance journey; there is still more to prepare for down the line, for example when the periodic reporting comes into play in January 2022.

How does it impact you?

The SFDR will apply to any EU regulated financial market participant and financial adviser. Entities outside the EU will be impacted either by their EU subsidiaries, or the provision of services.

Businesses affected include:

  • Insurance undertaking
  • Investment firm which provides portfolio management
  • Institution for occupational retirement provision (IORP)
  • Manufacturer of pension product
  • Alternative investment fund manager (AIFM)
  • Pan-European personal pension product (PEPP) provider
  • Manager of venture fund and/or social entrepreneurship fund
  • UCITS management company
  • Credit institution which provides portfolio management
  • Financial advisers of any of the above, if they provide insurance and/or investment advice

Financial products covered under SFDR include:

  • Managed portfolios
  • AIF
  • Insurance-based investment products (IBIP)
  • Pension product
  • Pension scheme
  • PEPP

What needs to be disclosed?

The disclosure requirements starting from March 2021 are considered at the level of the entity and of the product.

Entity-level disclosure

Financial market participants and financial advisers are required to disclose information on their corporate website regarding:

  • Their sustainability risk policy, detailing how they integrate sustainability risks into the investment decision-making process (mandatory requirement)
  • The consistent alignment of the remuneration policies with their sustainability objectives (mandatory requirement)
  • The principal adverse impact, outlining the adverse effects on sustainability of the investment decision and/or in the investment advice (comply or explain)

Product-level disclosure

At the same time, these companies are required to disclose product information related to sustainability for both ESG-related products and non-ESG products. The products or advice need to be classified into one of the three following categories:

  • Art 6 – funds that do not promote ESG investment characteristics
  • Art 8 – light green funds, i.e. funds which promote environmental or social characteristics (although not exclusively) and which invest in companies that follow good governance practices
  • Art 9 – dark green funds, i.e. ESG impact funds, which have either sustainable investment or reduction in carbon emissions as their objective

The periodic product reports, also called Level 2 of the regulation, have been delayed and are subject to further details from the European Commission. They will only apply from 1 January 2022.

How we can help you

Intertrust Group is working with clients to help you in your transition to sustainable finance and support you in complying with your regulatory obligations.

We partner with you to help you reach informed decisions, benefiting from the expertise gained from our large global client population and industry network. We endeavour to provide you with best in class industry solutions, flexible enough to meet individual needs.

*Adopted by 196 Parties at COP 21, the Paris Agreement on climate change entered into force in November 2016 to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels.