More Transparency for Sustainable Investments – EU Sustainable Finance Disclosure Regulation (SFDR)

By Michael Dittrich, Deutsche Bundesstiftung Umwelt


On March 10th the first step of the EU Sustainable Finance Disclosure Regulation, SFDR, has entered into force. The SFDR is a complicated term but extremely useful when it comes to fostering sustainable development in the EU. However, there are still some open questions about the classification to article 8 or article 9. But the SFDR is another step to more transparency for sustainable finance products and less greenwashing.

The background of the new rules are the European Union’s sustainable finance action plan and the European green deal which seek to transition the EU to a more resource efficient and sustainable economy and to build a financial system that supports sustainable growth.

SFDR is part of the EU action plan and closely linked with the EU Taxonomy regulation and the Non-Financial Reporting Directive (NFRD). It imposes requirements in all investment managers, irrespective of whether the manager manages on market funds or portfolios with an ESG focus. The requirements include disclosures by the investment manager on how he integrates sustainability into its decision making processes, how its remuneration policy is consistent with such requirements and insuring that its marketing communications do not contradict the disclosures under SFDR.

SFDR regulation contains rules for financial market participants and financial advisors. Financial market participants means for example insurance companies, investment firms, pension funds, manufacturers of pension fund products, managers of alternative investments, credit institutions which provide portfolio managements, but not private asset owners or foundations. The target is more transparency for the clients of the financial industry.

The new EU SFDR divides three categories of financial products regulated in article 6, 8 and 9.

Low level article 6:

Financial market participants and advisors have to inform about the manner in which sustainability risks are integrated into their investment decisions or investment advice and about the impact of sustainability risks on the returns of financial products. And if the financial advisors are thinking that there are no sustainability risks in the financial products they have to give clear explanations of the reasons therefore. There is not a duty to integrate sustainability in asset management or financial products but there is a duty to explain in which way sustainability risks are integrated or why there are no sustainability risks in the products.

Medium Level article 8:

Article 8 contains regulations about the transparency for financial products which were promoted under environmental or social characteristics, the typical ESG products in funds or ETFs for example.

For those products there is an information necessary how the characteristics of environmental or social are integrated and if they have a benchmark for that, they have to inform whether and how this benchmark is consistent with the characteristics in the product.

High level article 9:

It contains rules for financial products which have sustainability as an objective target of the product and a reference benchmark. Article 9 products have to inform how the benchmark is aligned to the objective of the sustainable financial product. And there is an explanation necessary why and how the benchmark differs from a broad market index like DAX 30, EURO STOXX 50 or S&P 500. If the financial product has no benchmark it has to inform how the objective is to be attained. If, for example, the target is to reduce the carbon emissions, it is necessary to describe in which way the objective includes the long-term global warming objectives of the Paris Agreement.

So the difference between article 8 and article 9 is that in article 8 we have financial products in which aspects of sustainability are integrated and a description of this integration and in article 9 we have additionally a target, for example a Paris Agreement aligned reduction of carbon emissions.

For article 8 it is sufficient that an ESG fund, for example with a best in class ESG management, uses a sustainable index, for example the Dow Jones sustainability index with a sustainability selection or if the market participant has an own best in class system than he has to describe in which way the system is able to fulfil the environmental or social characteristics.

Principle adverse impacts:

Article 4 of SFDR requires managers to publish on their website a statement on the due diligence policies concerning principal adverse impacts of investment decisions on sustainability factors, taking into account the managers size, nature, scale of activities and the type of financial products they make available. Or if a manager does not consider adverse impacts of investment decisions he has to explain the reasons why he does not do so, including where relevant information as to whether and when he intends to consider such adverse impacts in future. The intensity of that information depends on the number of employees in the finance company with more or less than 500 employees.

Open questions:

If there is a financial product or fund or ETF which has a carbon footprint 30% or 40% less than the benchmark EURO STOXX 50, DOW JONES 30 or S&P 500, it is clear that this is an environmental aspect which is integrated in the product. It is possible to describe it and to explain how the product reaches the minimization of the carbon footprints. This is aligning with article 8 but the question is: Would it also align with article 9? Is it enough to say to reduce the carbon footprint in a volume of 30% or 40% against the standard benchmark? Is that a target to realize the long term targets in the Paris Agreement?

What we need to answer these questions are regulatory technical standards and therefore the European supervisory authorities have to present the draft of technical standards for the targets in article 9 until the 1st of June 2021 and 2022. After this, the commission is authorized to complete the regulation with these technical regulation standards.

We ask now our special funds whether they are in line with article 8 or article 9 and why. And we ask also the public funds we are invested in with institutional tranches. Indeed, clear results remain to be seen as the regulation is still in progress.



Arian Okhovat, Communications F20 |

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