The SFDR was introduced by the European Commission, alongside the Taxonomy Regulation and the Low Carbon Benchmarks Regulation, as part of a package of legislative measures arising from the European Commission’s Action Plan on Sustainable Finance.

The main provisions (Level 1) of the Disclosure Regulation came into action in March this year. 

The initial application date of detailed rules for requirements (Level 2) was set for January 2022.  However, the European Commission decided to defer by six months as a consequence of its failure to hit the deadline for adopting draft regulatory technical standards (RTS) submitted by the European Supervisory Authorities (ESAs) in February.

While this delay is much welcomed by the industry itself, it may not prove sufficient for Asset Managers to get up to speed with the rapidly approaching changes. This is where Fundipedia can help. Our ESG reporting module is specifically designed to meet all regulatory demands, helping you to outline your SFDR strategy. 

For starters, here is a short glossary of the most important ESG terms you need to know:

Sustainability: 

The features which ensure companies, industries or markets can operate within their means while maintaining stability long term. It is also a subject of great subjectivity which is the ground for current “greenwashing” concerns in the industry. 

Greenwashing: 

Falsely claiming or exaggerating sustainable characteristics or environmental benefits provided by a fund, business practice or company. The main question at hand right now is whether SFDR is simply recoloring old businesses with new names…

ESG analysis: 

The examination of a company’s environmental, social and governance performance, which could be designed and used in any of the approaches described here. 

ESG integration: 

An investment approach in which a range of sustainability and ESG-related risks and opportunities are considered in addition to traditional financial risk analysis. 

ESG research providers: 

Firms that conduct quantitative and qualitative analysis of a company’s ESG performance and provide a standardised measure (such as a company ESG rating). Approaches and results can vary significantly across providers. 

Fund ESG ratings score: 

A third party rating that attempts to indicate the ESG credentials of a particular fund relative to an investment category or peer group, based on an assessment of the ESG credentials of a fund’s underlying holdings. 

Active ownership: 

A means of reducing investment risk, enhancing long term shareowner value, or both. It refers to actively engaging with the managers and boards of directors on business strategy and execution, including specific sustainability issues and policies. 

Best-in-class investment: 

A comparative investment style that involves investing only in companies that lead their peer groups in sustainability performance. 

Positive screening: 

An investment strategy that aims to select companies that demonstrate leading sustainability practices and are better positioned to benefit from, and build resilience to, long-term societal and economic trends.

ESG data:

Environmental, Social & Governance data. Pulls together data on many different areas such as energy consumption, climate, use of natural resources and good governance.

Sustainable investment:

According to the regulation (article 2.17 of regulation 2019/2088): “An investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on biodiversity and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labour relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.”

Article 8 and Article 9 products:

SFDR makes a distinction and imposes different disclosure obligations for so-called article 8 and article 9 products. In a nutshell: the biggest difference between these two is whether a financial product merely promotes sustainable characteristics (article 8 product) or when sustainable investment is part of its investment objective (article 9 product). The official definitions according to SFDR are:

  • Article 8 products: a financial product which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.
  • Article 9 products:
    •  the financial product has sustainable investment as its objective and an index has been designated as a reference benchmark; or
    • the financial product has sustainable investment as its objective and no index has been designated as a reference benchmark; or
    • the financial product has a reduction in carbon emissions as its objective.

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