SFDR (Sustainable Finance Disclosure Regulation)

What is SFDR?

What is the scope of the SFDR regulation?

Entered into force on March 10, 2021, the SFDR regulation applies to all financial products (open and dedicated) distributed in Europe and to all financial market participants (insurers, investment firms, pension institutions, fund managers) and financial advisors (investment advice).

The SFDR regulation is part of the broader framework of the EU's sustainable finance, which relies on a wide range of new and strengthened regulations that will apply across the entire bloc of 27 countries.

The regulation requires financial actors to enhance their investment policy, which must detail how sustainability risks are integrated into investment processes and remuneration policies. They will now also have to disclose the negative impacts of investment decisions on sustainability factors.

At the product level, new information must also be published (prospectuses, mandates, websites):

• the consideration of sustainability risks in investment decisions, these risks being defined as an event in the environmental, social, or governance domain which, if it occurs, could have a significant negative impact, actual or potential, on the value of the investment;
• the consideration of the principal adverse impacts on sustainability, that is to say the negative consequences of investment decisions on sustainable factors.

These two aspects, sustainability risks and adverse impacts, represent the two components of the "double materiality" related to the sustainability of an investment.

The SFDR also requires compliance with minimum social and environmental standards defined by international treaties. Thus, financial market participants must "do no significant harm." Financial market participants must also specify how their remuneration policy takes sustainability aspects into account.

The most visible and striking element of the new SFDR regulation is the classification of funds and mandates into three categories, as provided for in Articles 6, 8, and 9.

The new SFDR classification of funds according to Articles 6, 8, and 9.

The SFDR regulation primarily identifies three categories called "articles":

Article 9 SFDR

Article 9, the most virtuous, designates products with a sustainable investment objective, in other words, those that invest in an economic activity contributing to an environmental and/or social objective. The actors must explain the sustainable objectives of the product but also specify how they plan to achieve these objectives and evaluate the results obtained on these aspects. For these products, the improvement of an extra-financial indicator compared to its investable universe must be published year after year, this indicator having to be consistent with the sustainable objective of the product.

Article 8 SFDR

Article 8 designates products promoting sustainable characteristics. They incorporate environmental and/or social characteristics but do not pursue a sustainable investment objective, provided that the companies in which the investments are made apply good governance practices.

Article 6 SFDR

Products that do not fall into either of these two categories cannot be presented as sustainable and fall under the "Article 6" category.

What is the challenge of the SFDR regulation for management companies?

Investors no longer only look at the financial aspects of an investment but also its impact on society. They want not only to give meaning to their investment but above all to understand the purpose of their investment.

The SFDR regulation is a true catalyst and an opportunity for management companies and investors. It thus allows for clarifying, simplifying, and explaining what management companies do in terms of sustainable investment, and for proposing a common language.