The EU SFDR is a regulation that is designed to make it easier for investors to distinguish and compare between the many sustainable investment strategies that are now available within the European Union. The EU SFDR aims to help investors by providing more transparency on the degree to which financial products consider environmental and/or social characteristics, invest in sustainable investments or have sustainable objectives. This information is now being presented in a more standardised way.
The EU SFDR requires specific firm-level disclosures from asset managers and investment advisers regarding how they address two key considerations: Sustainability Risks and Principal Adverse Impacts. With regards to asset managers, the EU SFDR also mandates transparency of remuneration policies in relation to the integration of sustainability risks. In addition, the EU SFDR aims to help investors to choose between products by mandating increasing levels of disclosures, depending on the degree to which sustainability is a consideration.
Three different product categorisations result from EU SFDR:
- "Article 6" products either integrate financially material environmental, social and governance (ESG) risk considerations into the investment decision-making process, or explain why sustainability risk is not relevant, but do not meet the additional criteria of Article 8 or Article 9 products3.
- “Article 8” products promote social and/or environmental characteristics, and may invest in sustainable investments, but do not have sustainable investing as a core objective.
- “Article 9” products have a sustainable investment objective.
It is important to note that these product categories are not labels, although many investment firms have treated them as such (see below, “What are the additional upcoming developments that investors should be aware of?” for more information on this issue).
The EU SFDR also introduces asset level considerations, definitions and conditionality, dividing investments into those that (i) have environmental and/or social characteristics, (ii) can be considered “sustainable”, and (iii) “other” (investments that do not meet either of the two preceding criteria).4
The disclosures, which went into effect on 10 March 2021 – and which apply to several financial products, including UCITS, AIFs and segregated mandates – were rolled out in two phases:
- Core disclosures (Level 1) effective March 2021, which apply at an entity level to Sustainability Risks and Principal Adverse Impacts, and at a product level to Article 6, 8 and 9 products.
- Enhanced disclosures (Level 2) effective January 20235, which apply at an entity level to Principal Adverse Impacts, and at a product level to only Article 8 and 9 products.
It is important to note that regulators continue to issue new guidance and statements related to these disclosures and how they should be interpreted, and industry understanding of these requirements continues to evolve6.