The first of January marks a significant milestone in the European Union’s efforts to promote sustainable and responsible investing. The EU introduces the level 2 Regulatory Technical Standards for the Sustainable Finance Disclosure Regulation, known as SFDR. This requires sustainable investment funds to make a bigger effort to explain how they seek to achieve a positive impact.
The introduction of the level 2 standards is expected to have a significant impact on the financial industry, as it will require firms to review and potentially revise their sustainability-related policies and procedures. It will also provide investors with more comprehensive and comparable information on the sustainability performance of financial products, enabling them to make more informed investment decisions.
‘Not designed to dictate’
The regulation however leaves room for funds to define their own approach towards sustainable or responsible investments. Fund managers are mainly required to explain their strategy in a credible manner.
“This regulation is not designed to dictate what is an acceptable sustainable strategy, and we welcome that,” said Georgina Parker, head of sustainability at Quaero Capital, in a note to clients. “This is important, because we expect to continue to see different views on what can be considered a sustainable investment and what cannot.”
The SFDR, which came into force in March 2021, requires financial market participants and advisers to disclose information on the integration of sustainability risks and opportunities in their investment decision-making processes, as well as the impact of their products on sustainability. The level 2 standards, which was published in the Official Journal of the EU on December 9, 2021, provides further detail on how these disclosure requirements should be implemented in practice from January.
The standards in particular set requirements for the stories that funds offer to investors. Marketing information, formally known as pre-conctractual disclosures, of dark green SFDR Article 9 funds and green Article 8 funds need to comply with a EU-wide template. Information on funds› website also is required to be aligned.
Furthermore, funds need to start using the EU template for their statements on the principle adverse sustainability impact, known as PAI, as well as the templates for periodic disclosures. From June 2023, these disclosures also have to be reported.
Investors still disagree
Quaero’s Parker noted that, when it comes to sustainable finance, investors still disagree about what is most important. “Can a fund with a high carbon emission intensity be considered sustainable? In our opinion, yes it can, if the fund manager is engaging the company to reduce their emissions and/or the company is having a significant impact on reducing future carbon emissions.”
Other investors may wish to enforce a threshold, or a filter based on this metric, viewing it as now mandatory that companies are operationally in line with a 1.5 degrees scenario. “It should be up to the investor to decide whether this is a fit to their values and their investment strategy,” Parker said in a note to investors.
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Standardisation of terms and methods
The level 2 standards set out specific requirements for the disclosure of sustainability-related information, including the use of standardised terminology and methodologies, and the need for transparency in the calculation of sustainability-related metrics. It also establishes requirements for the presentation of information, such as the use of clear, concise and comparable language, and the use of visual aids to facilitate understanding.
The EU›s efforts to promote sustainable and responsible investing through the SFDR and its accompanying standards are in line with the broader global trend towards sustainable finance. With the adoption of the Paris Agreement and the United Nations› Sustainable Development Goals, there is increasing recognition of the need to align financial systems with long-term sustainable development.
Overall, the introduction of the level 2 standards for the SFDR marks a significant step forward in the EU›s efforts to promote sustainable and responsible investing, and is likely to have a significant impact on the financial industry and investors. It is hoped that these efforts will contribute to the transition towards a more sustainable and resilient financial system.
Luxembourg proactive
Luxembourg, as a small but influential financial hub in the heart of Europe, has in recent years made a clear push towards sustainable finance. As the world becomes increasingly aware of the need for a more sustainable and responsible financial system, Luxembourg is positioning itself as a leader in this area.
When it comes to the implementation of the SFDR level 2 standards, Luxembourg financial supervisor CSSF, has taken a proactive approach and already asked funds and asset managers to share their update marketing documents at the end of October. CSSF has offered a “visa-stamping” approval process for both Ucits and alternative investments funds to speed up the process.
Those firms that had updated the pre-contractual marketing documents for their funds by 31 October “may benefit of an accelerated examination and visa stamping of the prospectus” provided that a number of conditions were met. Fund requests from 1 November are being dealt with on a “best effort basis,” CSSF has said.
Related articles on Investment Officer Luxembourg:
- Amundi reclassifies ‘almost all’ Article 9 funds to Article 8
- CSSF tells funds to keep promises on what they sell
- Sustainable finance: Great reclassification is coming