SFDR Website Disclosures: A Comprehensive Guide to Sustainable Finance Transparency.
When it comes to the Sustainable Finance Disclosure Regulation, navigating the intricacies of disclosures on your website can seem like a formidable task. It demands not only a deep understanding of regulatory requirements, but also the dedication of time, resources, and technical expertise to effectively convey your sustainability efforts. This article aims to clarify the world of SFDR website disclosure, shedding light on its significance and guiding you on how to integrate SFDR-related information into your online presence. Whether you're a financial institution, investment firm, or any entity subject to SFDR regulations, this guide will help you navigate the disclosure landscape and ensure compliance, regardless of your organization's stage of maturity in sustainability reporting.
In times marked by increasing awareness of environmental and social responsibility, the financial industry is undergoing a transformation towards sustainability. The Sustainable Finance Disclosure Regulation (SFDR) stands at the forefront of this movement, urging financial market participants and financial advisors to be transparent about their sustainability practices.
SFDR is notably complex due to its many detailed requirements for disclosing information. Think of it like putting together a puzzle – each piece has to fit in the right place. As it necessitates not only general sustainability integration strategies at entry-level but also product-specific details.
There are three types of disclosures required at the product level: the pre-contractual disclosure, the periodic disclosure, and the website disclosure. The latter varies from the other two types of disclosures. The product disclosure on the website offers extra information concerning the investment approach applied to the relevant financial product. Additionally, financial market participants are required to make available a concise and comprehensible summary of the disclosed information from the periodic reports on their website.
COMPLIANCE CHECKLIST FOR SFDR WEBSITE DISCLOSURES
AT THE ENTITY LEVEL:
◻Sustainability Risk Policy
◻Remuneration Policy
For FMPs Considering PAIs:
◻PAI statement published on the website under the section entitled ‘Statement on principal adverse impacts of investment decisions on sustainability factors’.
◻Summary: description of policies to assess PAIs, engagement policies, and references to international standards.
◻Must be published by 30th June 2024 in respect of a reference corresponding to the 2023 calendar year.
For FMPs NOT Considering PAIs
◻The information shall be published under a separate section entitled ‘No consideration of adverse impacts of investment decisions on sustainability factors’.
◻Reasons why the FMP does not consider any adverse impacts of its investment decisions on sustainability factors, and where relevant, information on whether the FMP intends to consider such adverse impacts by reference to the indicators listed in Table 1 of Annex I of the RTS, and if so, when.
AT THE PRODUCT LEVEL:
◻Article 8 Financial Products disclosure requirements
◻Article 9 Financial Products disclosure requirements
LEGAL ENTITY WEBSITE DISCLOSURE:
SFDR establishes guidelines for Financial Market Participants (FMPs) and Financial Advisors (FAs) to disclose sustainability-related information at the level of their legal entity on a website. When these entities make disclosures, they are required to disclose policies outlining their method of integrating sustainability risks into their investment decision-making processes.
| FINANCIAL MARKET PARTICIPANTS | FINANCIAL ADVISORS | |
|---|---|---|
| SUSTAINABLE RISK POLICY (Art. 3) | Information about their policies on the integration of sustainability risks in their investment decision-making | Information about their policies on the integration of sustainability risks
|
| ADVERSE SUSTAINABILITY IMPACT (Art. 4) | Consideration of principal adverse impacts of investment decisions on sustainability factors Statement on due diligence policies Mandatory for entities with above 500 employees and a net turnover over EUR 40 000 0000 “Comply or explain” mechanism for all other entities* | Consideration of principal adverse impacts on sustainability factors in the investment advice or insurance advice
“Comply or explain” mechanism
|
| REMUNERATION POLICY (Art. 5) |
Information on how remuneration policy are consistent with the integration of sustainability risks | |
PRODUCT WEBSITE DISCLOSURE:
Financial market participants should feature the specified details for each financial product in a designated 'Sustainability-related disclosures' section on their website. This section should seamlessly blend with other financial product information and marketing content. It's crucial to distinctly associate the disclosed information with the relevant financial products while prominently showcasing their environmental, social attributes, or sustainable investment goals.
The Devil is in the Details:
What should be in the website disclosure for Art. 8 Funds:
Summary
Summarize information regarding the financial products that promote environmental and social characteristics.
Maximum length: two sides of A4-sized paper when printed.
Languages: Home Member State + one more for other States.
No sustainable investment objective
Insert this statement: ‘This financial product promotes environmental or social characteristics, but does not have as its objective sustainable investment’.
If a financial product commits to making sustainable investments, in the 'No sustainable investment objective' website section, explain how the sustainable investment does not significantly harm any of the sustainable investment objectives, including:
How they consider adverse impact indicators (Table 1, Annex I).
Whether sustainable investment aligns with OECD Guidelines and UN Guiding Principles on Business and Human Rights, including labor and human rights conventions.
Environmental or social characteristics of the financial product
Describe the environmental or social characteristics that the financial product promotes
Investment Strategy
Describe the investment strategy used to meet the environmental or social characteristics promoted by the financial products and the policy to assess good governance practices of the investee companies, including with respect to sound management structure, employee relations, remuneration of staff, and tax compliance.
Proportion of Investments
Disclose the information in the format of the template set out in Annex II.
Write a statement that the information about the environmental or social characteristics is available in the annex.
Distinguish between direct exposures in investee entities and all other types of exposures to those entities.
Monitoring of environmental or social characteristics
Describe how the financial product's environmental or social characteristics are tracked from start to finish, including the sustainability measures used. Mention whether the financial products are monitored throughout the lifecycle of the financial product and the related internal or external control mechanisms.
Methodologies for environmental or social characteristics
Describe the methodologies to measure how the social or environmental characteristics promoted by the financial product are met.
Data sources and processing
The financial market participants shall describe all of the following:
The data sources used to achieve each of the environmental or social characteristics promoted by the financial product
The measures taken to ensure data quality
How data are processed
The proportion of data that are estimated
Limitations to methodologies and data
Describe any limitations to the methodologies and to the data sources and how such limitations do not affect how the environmental or social characteristics promoted by the financial product are met
Due diligence
Describe the due diligence carried out on the underlying assets of the financial product, including the internal and external controls on that due diligence
Engagement policies
Describe the engagement policies implemented where engagement is part of the environmental or social investment strategy, including any management procedures applicable to sustainability-related controversies in investee companies
Designated reference benchmark
Check if the index aligns with the product's environmental or social goals through data, selection, rebalancing, and calculation methods
Provide hyperlinks in cases where all of the information is published
What should be in the website disclosure for Art. 9 Funds:
Summary:
Summarize all the information regarding the financial products that have sustainable investment as their objective.
Max two sides of A4-sized paper when printed.
Languages: Home Member State + one more for other States.
No significant harm to the sustainable investment objective:
Explain whether and why the investment of the financial products does not significantly harm any of the sustainable investment objectives, and provide all of the following information:
How they consider adverse impact indicators (Table 1, Annex I).
Whether sustainable investment aligns with OECD Guidelines and UN Guiding Principles on Business and Human Rights, including labor and human rights conventions.
Sustainable investment objectives of the financial products:
Describe the sustainable investment objective of the financial product.
Investment strategy:
Describe the following:
The investment strategy used to achieve the sustainable investment objective.
The policy to assess good governance of the investee companies, including with respect to sound management structures, employee relations, remuneration, and tax compliance.
Proportion of investments:
Insert the information on the website referred to in the section ‘What is the asset allocation and the minimum share of sustainable investment?’ in the template set out in Annex III in the Delegated Regulation (EU) 2022/1288, and distinguish between direct exposures in investee entities and all other types of exposures to those entities.
Monitoring of the sustainable investment objective:
Describe how the sustainable investment objective and the sustainability indicators used to measure the attainment of the sustainable investment objective are monitored throughout the lifecycle of the financial products and related internal and external control mechanisms.
Methodologies:
Describe the methodologies used to measure the achievement of the sustainable investment objective and how the sustainability indicators to measure the attainment of that sustainable investment objective are used.
Data sources and processing:
The financial market participants shall describe all of the following:
The data sources used to attain the sustainable investment objective of the financial product.
The measures taken to ensure data quality.
How data are processed.
The proportion of data that is estimated.
Limitations to methodologies and data:
Describe the following:
Any limitation to the methodologies and data sources.
Why such limitations do not affect the achievement of sustainable investment objectives.
Due diligence:
Describe the due diligence carried out on the underlying assets of the financial product, including the internal and external controls on that due diligence.
Engagement policies:
Describe the engagement policies implemented where engagement is part of the sustainable investment objective, including any management procedures applicable to sustainability-related controversy in investee companies.
Attainment of the sustainable investment objective
Describe the following:
Financial products with sustainable investment goals must align their designated benchmark index with sustainability objectives: It includes details on input data, data selection methods, rebalancing processes, and index calculation. If this information is on the benchmark administrator's website, provide a hyperlink for easy access.
For financial products targeting carbon emission reduction, state if the reference benchmark is EU Climate Transition or Paris-aligned. Provide a hyperlink to the benchmark methodology. If not applicable, explain efforts for Paris Agreement objectives. Also, clarify compliance with Delegated Regulation (EU) 2020/1818.
REMEMBER!
Ensure the reliability of information published on the website - such information should be kept up to date, and any revisions or changes to such information should be clearly explained.
Bibliography
SFDR Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019
SFDR Technical Requirements of Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022
