What is SFDR?
Five key questions answered about the EU’s new SFDR sustainability rules
What is SFDR
The SFDR rules – which come into effect this year – give asset managers like AXA IM a template for reporting how environmental, social and governance (ESG) factors are handled at both firm level and product level. That should give clients a simpler way to compare how asset managers are approaching major sustainability issues like climate change.
Asset Managers will provide greater transparency on the degree of sustainability of financial products so that they can be compared. This includes:
- Consideration of sustainability risks, including the risk of depreciation in the value of underlying assets due to environmental or social events.
- Consideration of principal adverse impacts (PAI) on sustainability factors; these are the negative effects on environmental, social and employee matters as well as respect for human rights, anti-corruption and anti-bribery resulting from an investment decision.
- Sustainable investments in economic activities that contribute to environmental or social objectives. They include investments in EU-taxonomy-eligible economic activities.
What products are affected?
There are three distinct categories, known by the name of the part of the SFDR regulation that applies in each case:
- Article 6 products are those which only assess and address sustainability risks.
- Article 8 products are deemed to be those that promote environmental and social characteristics, taking ESG criteria into account as part of the investment process.
- Article 9 products have a sustainable objective and therefore target specific sustainability outcomes – either environmental or social – alongside targets for financial returns. They aim to reduce, as far as possible, any negative effects in respect of environmental, social and employee matters, as well as embedding respect for human rights, anti-corruption and anti-bribery into investment decision making.
- Thanks to SFDR, asset managers will now be able to state what percentage of their assets under management are classified as Article 6, Article 8 or Article 9.
What kind of information will be published?
For products considered to fall under Article 8 or Article 9, there are more detailed requirements. Asset managers must publish:
- How the investment strategy takes into account the ESG characteristics or the sustainable objective, including with regard to planned asset allocation.
- Details of the ESG objective/objectives and a breakdown of the different categories of investment.
- Details of how negative impacts are quantified and addressed and how holdings that might cause harm to the sustainability objectives are screened out.
- A list of applicable sustainability indicators.
- Information on how the use of derivatives is consistent with the ESG aims of the product.
Are there any other changes?
Again, the new rules set consistent and common templates for all affected firms to follow. In total there are 18 mandatory items, which will require significant disclosures from investee companies.
Why has this happened now?
That means that it is now possible to quantify and compare ESG outcomes far more effectively than it was before. The advent of the SFDR rules reflects this encouraging development, but it also reflects the rise of sustainability as a priority at government level. SFDR is part of a wider European Union effort to reorient capital allocation towards more sustainable business models. More generally, this comes as part of a global trend which includes commitments such as those entered into as part of the Paris Agreement on climate change.
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