EU Sustainable Finance Disclosure Regulation

It forms part of the EU’s wider Sustainable Finance Framework which is backed by a broad set of new and enhanced regulations that will apply across the 27-nation bloc. The SFDR goes hand in hand with the Sustainable Finance Action Plan which aims to promote sustainable investment across the EU, and a new EU Taxonomy to create a level playing field across the whole EU.

All the new measures are in response the landmark signing of the Paris Agreement in December 2015, and the United Nations 2030 Agenda for Sustainable Development earlier in 2015, which created the Sustainable Development Goals. The SFDR and other regulations are also aligned with the European Green Deal, which aims to see the EU carbon neutral by 2050.

The most visible and impactful element in the new SFDR regulation is the classification of funds and mandates in three categories, as laid out by Articles 6, 8 and 9 of the SFDR.

• Article 6 covers funds which do not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG funds such as tobacco companies or thermal coal producers. While these will be allowed to continue to be sold in the EU, provided they are clearly labelled as non-sustainable, they may face considerable marketing difficulties when matched against more sustainable funds.
• Article 8, also known as environmental and socially promoting’, applies “… where a financial product 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, also known as ‘products targeting sustainable investments’, covers products targeting bespoke sustainable investments and applies “… where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark.”

Subject to final approval from the regulatory authorities, Robeco expects that most of its funds will be classified as Article 8, with the Impact Investing range (branded as RobecoSAM) classified as Article 9, and a handful of Article 6. In practical terms, asset managers will need to update fund prospectuses, website product information and Key Investor Information Documents (KIIDs), along with their due diligence policy.

Adverse impact statements will be introduced from June 2021. These require an asset manager to describe its due diligence policy on how it will take the principal adverse impacts which investee companies have on sustainability factors into account when making investment decisions.

This will be policed using a system of 50 adverse impact indicators, of which 32 will be mandatory to report, and 18 will be voluntary. The compulsory factors range from carbon emissions, fossil fuel exposure and waste levels (E) to gender diversity and due diligence over human rights (S) and a company’s record on exposure to corruption, bribery or other scandals (G).

While detailed requirements relating to adverse impact are only expected to become final in January 2021, Robeco has dedicated efforts to make sure it is prepared, for example by creating adverse impact prototype tooling to assess how funds perform when measured on the indicators.

A project management team of over 30 staff representing all key departments in Robeco is leading efforts in this process to make sure the whole firm is compliant. Many of Robeco’s clients will also become subject to the new regulatory requirements. Apart from being ready to make its own disclosures in prospectuses, annual reports and on the website, Robeco will therefore support its clients in providing the information they need to become compliant with the new framework.

See also: EU Sustainable Finance Action Plan, EU Taxonomy, Paris Agreement, European Green Deal.