13 January 2023

Regulation

SFDR Regulation - What is the scope of application?

Franck Pinot,

Head of Strategic Marketing and Projects CPR AM

The European Commission has released its Sustainable Finance Disclosure Regulation (SFDR) for the purpose of directing capital flows towards sustainable businesses and setting requirements for investment products advertised as sustainable. The regulation aims to harmonise transparency obligations and provide investors with information on the ESG features of financial products.

Here’s a look at SFDR’s requirements and how they affect CPR AM.

Wat is the scope of application of the sfdr regul ation?

SFDR came into force on 10 March 2021. It applies to all financial products (open-ended and dedicated) distributed in the EU and to all financial market participants (insurance companies, investment firms, pension funds and fund managers) and financial and investment advisors).

SFDR requires financial market participants to expand their investment policies with detailed disclosures on how sustainability risks are integrated into their investment processes and remuneration policies. They must also disclose any negative impacts of investment decisions on sustainability factors.

At the product level, new disclosures are also required in prospectuses and mandates and on websites in the following areas:

  • How sustainability risks figure into investment decisions, these risks being defined as environmental, social or governance events that, if they occurred, could have an actual or potential negative material impact on the value of the investment
  • The main negative impacts on sustainability, i.e., the negative consequences of investment decisions on sustainable factors.

Both aspects – sustainability risks and negative impacts – are the two components of “double materiality” in the sustainability of an investment.

SFDR also requires compliance with the minimum social and environmental standards set down in international treaties. For example, financial market participants must “do no significant harm”. T hey must also disclose how their compensation policy takes sustainability issues into account.

Sfdr also defines a new product classification. what about it?

The SFDR regulation establishes three main categories, called “articles”.

  • Article 9, the most virtuous, covers products having a sustainable investment goal, in other words an investment in an economic activity furthering an environmental and/or social objective. Market participants must explain the product’s sustainable goals, specify how they intend to achieve such goals, and assess the outcomes achieved.
  • For these products, an improvement in the extra-financial indicator vs. its investible universe must be disclosed each year, and the indicator must be consistent with the product’s sustainable goals. For example, a fund focused on the circular economy might highlight an improvement in waste-recycling rate or in the volumes recycled by the invested company.

  • Article 8 covers products promoting sustainable goals. They incorporate environmental and/or social goals but without pursuing a sustainable investment goal, as long as the companies in which investments are made have good governance practices. Unlike products categorised in Article 9, no methodological explanation is required, nor any assessment and improvement of criteria, nor any transparency.
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  • Products not covered by these two categories cannot be presented as sustainable and are covered by “Article 6”.

What is the challenge for cpr am and, more generally, for asset managers?

We are seeing a true shift in paradigm. Investors no longer look at an investment’s financial aspects alone, but also at its impact on society. They want not just to give meaning to their investment but also, and especially, to understand what purpose that investment serves.

SFDR is a true catalyst and an opportunity for asset managers and investors. It helps them clarify, simplify and explain what asset managers are doing in sustainable investment, and puts forth a common language.

Europe, and France in particular, are doing rather well in this area. France is mostly on the forefront in developing sustainable finance. There was its Article 173 of the Energy Transition Law passed in summer 2015, ahead of COP 21, and its most recent example, the AMF doctrine that entered into force in March.

What are the next challenges in meeting sfdr obligations?

Even so, there is still some way to go. SFDR is still not finalised for all financial market participants, and new regulations will take over. Moreover, the entire ecosystem around data supply and mining is still under development and expanding very fast. (Don’t forget that until recently there was nothing in this area!). This is what materialises the actual outcomes achieved in sustainable development.

Asset managers such as CPR AM who invested very early in this area through partnerships with data providers will be the big winners. Moreover, as part of the normalisation of extra-financial indicators, the French Asset Management Association (AFG) has identified those trans-sector indicators that are essential for assessing companies of all sizes and, hence, identifying the minimum number of disclosures that must be included in companies’ publications.

What about cpr am? how has it responded to transparency and sustainable investment challenges?

CPR AM first went down its sustainable finance path as far back as 2007 and has picked up its pace in the past five years. From integrating ESG to impact investing, we have expanded and transformed our range to address new standards set forth by investors, regulators and society as a whole. 96% of AuM of CPR AM’s open-ended funds are in Article 8 or Article 9 funds.

Thematic investment and sustainable development share the same long-term horizon, including thematic and climate solutions that have expanded in recent years.

CPR AM wants to be a key player in impact management, and SFDR is helping it to do that. To date, 14% of CPR AM’s open-ended funds have a sustainable investment (that is measurable and reportable,) as defined by SFDR Article 9.

Moreover, over the past three years we have set up monthly extra-financial reports for all our funds managed under a sustainable approach. This includes their ESG rating and details of each component, as well as an exhaustive view of CO2 data, including carbon footprint, main contributors, exposure to green technologies, carbon reserves, and so on.

We have begun to publish annual impact reports for our range of thematic funds, starting with Education and Climate in 2020. Food For Generations and Social Impact are next.

Find out more