To achieve the EU SFDR’s goal of improving sustainable finance by increasing transparency and creating standards, asset managers and advisers must disclose the manner in which they consider two key factors: Sustainability Risks and Principal Adverse Impacts. Asset managers are required to disclose their policies at both the firm and product level, while advisers are required to explain how they consider these factors in their advice.
The EU SFDR outlines specific definitions for Sustainability Risks and Principal Adverse Impacts:
- Sustainability Risks refer to environmental, social or governance events, or conditions, such as climate change, which could cause a material negative impact on the value of an investment.
- Principal Adverse Impacts are any negative effects that investment decisions or advice could have on sustainability factors. Examples could include investing in a company with business operations that significantly contribute to carbon dioxide emissions, or that has poor water, waste or land management practices.
Asset managers and advisers need to provide specific information on Sustainability Risks and Principal Adverse Impacts
Larger firms are required to disclose how they consider Principal Adverse Impacts from 30 June 2021, with Principal Adverse Impact reporting estimated to commence mid-2023 (representing Principal Adverse Impact data throughout 2022).
Subject to it being passed into EU law , from 1 July 2022, asset managers will be required to break out how they consider Principal Adverse Impacts into more specific and quantifiable detail, including in the region of nine indicators related to climate and the environment, and five indicators related to social and employee issues, respect for human rights, and anti-corruption and anti-bribery matters. There are currently an additional 16 environmental and 24 social indicators, which are optional, for which investment managers are encouraged to provide detail, when possible.
Number and type of sustainability indicators for measuring Principal Adverse Impacts
For asset managers, incorporating Sustainability Risks and Principal Adverse Impacts happen at several points during the investment process.
Checklist for asset managers incorporating Sustainability Risks and Principal Adverse Impacts into the investment process
Key Impacts