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The SFDR Burden is Increasing for Asset Managers


Today, April 14th 2023, the European Commissioner for financial services Mairead McGuinness has published amendments on the interpretation of Regulation (EU) 2019/2088. These amendments seek to clarify how under the Sustainable Finance Disclosures Regulation (SFDR), investment products can be sold as “sustainable” to investors after asset managers downgraded many of their funds due to uncertainty over the rules.


In summary, the commission answers the following questions:

  • Must a product to which Article 9(1), (2) or (3) of Regulation (EU) 2019/2088 apply only invest in sustainable investments as defined in Article 2(17) SFDR?
  • If not, is a minimum share of sustainable investments required (or would there be a maximum limit to the share of “other” investments)?
  • Where an EU Climate Transition Benchmark (EU CTB) or EU Paris-aligned Benchmark (EU PAB) exists, is it necessary for a product to track an EU PAB or an EU CTB on a passive basis for Article 9(3) of Regulation (EU) 2019/2088 to apply to it?


The commission answered that recital 21 of Regulation (EU) 2019/2088 of the European Parliament and of the Council1 (‘SFDR’) makes it clear that sustainable financial products with varying degrees of ambition as to “sustainability” have been developed to date. Accordingly, where such financial products do not have ‘sustainable investment’ as their objective, as referred to in Article 9 SFDR, they are considered to fall under Article 8 of that Regulation.The Commission clarified that the SFDR does not prescribe a single methodology to account for sustainable investments. Noting that Article 5 and Recital 19 to Regulation (EU) 2020/852 of the European Parliament and of the Council also clarify that ‘sustainable investments’ include investments into ‘environmentally sustainable economic activities’ within the meaning of that Regulation.

It is further noted that a financial product, in order to meet requirements in accordance with prudential, product-related sector-specific rules may next to ‘sustainable investments’, also include investments for certain specific purposes such as hedging or liquidity which, in order to fit the overall financial product’s sustainable investments’ objective, have to meet minimum environmental or social safeguards, i.e. investments or techniques for specific purposes must be in line with the sustainable investment objective. Since Article 9 SFDR remains neutral in terms of the product design, investing styles, investment tools, strategies or methodologies to be employed or other elements, the product documentation must include information on how the given mix complies with the ‘sustainable investment’ objective of the financial product in order to comply with the “no significant harm principle” of Article 2, point (17), SFDR.


Data Management for Sustainable Investment

Having answered the questions above the commission turned its focus to data management. The commission is clear that where a financial market participant fails to collect data on the environmental objective or objectives set out in Article 9 of Regulation (EU) 2020/852 and on how and to what extent the investments underlying the financial product are in economic activities that qualify as environmentally sustainable under Article 3 of that Regulation by a given financial product, the pre-contractual and periodic product related disclosures must indicate zero. The commission highlights that should financial market participants decide to use narrative explanations on lack of reliable data, such narratives risk contradicting the purpose of Articles 5 and 6 of Regulation (EU) 2020/852.


ESA launches joint consultation on the review of SFDR Delegated Regulation

These amendments come just two days after the ESA launched the joint consultation on the review of the SFDR Delegated Regulation.The consultation set out changes to key elements of the sustainable finance framework including the Do No Significant Harm (DNSH) test and the principle adverse impacts (PAI) indicators. The proposals are aimed at weaknesses in the framework.It is clear that changes are afoot and that the burden of SFDR is increasing for the asset management industry. Asset managers will be required to report on new social indicators used under the PAI and this may force asset managers to revisit their categorisation of Article 8 and 9 products. This includes new measures on tax avoidance, involvement in tobacco production and union interference. Indicators for investing in real estate will also be created.The consultation period for the ESA’s proposals closes on July 4th. It is likely that the European Commission will then endorse and adopt the changes.


Find out how AQMetrics helps asset managers with SFDR here.