European Commission updates SFDR guidance
April 20, 2023
The European Commission (EC) has amended guidance to clarify how to interpret the Sustainable Financial Disclosure Regulation (SFDR).
In response to questions posed by the European Supervisory Authorities, the updated guidance confirmed there will be no minimum requirements for fund providers.
The EC stated SFDR would not “prescribe any specific approach to determine the contribution of an investment to environmental or social objectives.”
Under SDFR, funds labelled as sustainable must be invested in an economic activity that contributes to an environmental or social objective.
The rules aim to ‘do no significant harm’ to the environment, therefore product providers must publish their methodology and explain how their investments do no harm to their objectives.
Fund descriptions must also include a report of their adverse impacts and the procedures put in place to mitigate those impacts.
Further amendments clarified that Article 8 and Article 9 are two distinct product categories.
To be categorised as Article 9, a fund can be actively or passively managed, but it must contain sustainable investment as its objective.
Any Article 9 fund that aims to reduce carbon emissions is required to include the Paris-Aligned Benchmark (PAB) or Climate Transition Benchmark (CTB) that it is tracking.
If a fund does not track a benchmark, it must include a detailed explanation of how reducing carbon emissions is in line with the global warming objectives of the Paris Agreement.
Article 8 funds may also include carbon emissions reductions as part of their investment strategy, but investors must not be misled into thinking they are part of the fund’s objective.
As a result, the product provider must not produce any marketing communications that promote carbon emission reductions as the fund’s objective.
The success of SFDR led the FCA to propose the introduction of Sustainable Disclosure Requirements and investment labels to become the UK’s equivalent of the rules.
However, the implementation date of these rules has been delayed from the first half of this year to Q3 to allow the regulator sufficient time to assess feedback.
Last Updated: 20 April 2023