SFDR Explainer: New disclosure requirements for EU asset managers

In December 2019, the EU published its Regulation on sustainability‐related disclosures in the financial services sector, otherwise known as SFDR. The regulation places disclosure and transparency requirements on financial market participants to a degree not seen before.

Between April and September of this year, EU groups held a consultation on the proposed regulatory technical standards (RTS) that will accompany the SFDR. The draft RTS proposed detailed requirements that are significantly more onerous than anticipated and which represent a significant undertaking for firms involved. There has since been a delay to the expected December 2020 publication of the RTS, which is now expected in January 2022.

What needs to be disclosed?

The draft RTS sets out specifications for the content, methodology and presentation of a range of diverse sustainability disclosures. These are split into entity-level ‘adverse impact’ disclosures and product-level disclosures for ESG focussed products.

The robust requirements in the draft RTS include quantative website disclosures, to available online for 10 years, of:

• 32 mandatory indicators/metrics;
• at least one of the 11 additional indicators/metrics on adverse climate/environment impacts that qualify as principal;
• at least one of the seven additional indicators/metrics on a social/employee/human rights/anti-corruption/anti-bribery adverse impacts that qualify as principal, and
• any other adverse impact on a sustainability factor that qualifies as principal.

There is also an adverse sustainability impacts statement to be published, detailing policies and actions employed to address adverse sustainability impacts.

At the financial product-level, companies must disclose additional website-based information in the pre-contractual materials for a financial product, and also in the periodic information provided to investors for products which promote environmental or social characteristics.

What can firms do now?

It is still unclear post-Brexit whether the UK will onshore the finl RTS into law, but with 10 March 2021 nearing, businesses that are in scope need to act soon. Key actions should be:

• agreeing the necessary policy decisions that will shape compliance with the SFDR, such as ‘comply or explain’ with regards to implementing an adverse impacts policy;
• assess which products are in the scope of SFDR Articles 8 and 9;
• identifying what disclosure data will be required to comply and what existing data sources are available, and
• organising internal processes and responsibilities necessary to meet disclosure requirements.

Tricarbon can help with gap analysis, materiality analysis, advisory services, roadmap/project planning, preparing policies and drafting SFDR disclosures. Please get in touch to discuss how we can assist you.