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The EU Sustainable Finance Disclosure Regulation (the SFDR) is one of the legislative outcomes of the European Commission's action plan on financing sustainable growth set in 2018.
This guide is an introductory guide to the SFDR and the requirements it lays down for Fund Managers and the products they manage. It will help smaller Fund-Managers, who would like to largely do the work themselves with our tool's assistance, to understand the intricacies of the SFDR and its reporting requirements.
The guide is divided into chapters covering different topics, with links to other articles within our knowledge centre that should build your understanding as you go.
If you want to get a comprehensive understanding, follow the guide chronologically, and feel free to skim through articles whose content you are already familiar with.
Happy learning!
Scope and Structure
The SFDR was adopted and published in the Official Journal in 2019, and was divided, through the Lamfalussy process, into Level 1 and Level 2 requirements.
Another segregation of importance is the segregation between requirements set on 'entity-level' (i.e., for Fund Managers in control of all of their Funds) and on 'product-level' (i.e., requirements for specific Fund).
To learn more about these segregations, please consult these articles on:
Principal Adverse Impact Indicator (PAI) framework
The European Commission (EC) established a set of PAI indicators to measure the principal adverse impacts of Fund Managers' investment decisions on sustainability factors.
The framework is set in a way to allow for Fund Managers to opt-in or -out of reporting, both as Fund Manager and for each individual Fund they manage.
The latter indicators measure the negative effects an investment decision might have on sustainability. This includes environmental and social factors, but also employee- and human-rights matters as well as anti-corruption and anti-bribery.
Below, please find explanatory articles on the PAI framework and its use:
- What are the PAIs?
- Comply or Explain Decision for PAI indicators
- Sustainability Impact Disclosures
- Examples of PAI Statements
- Mandatory Principal Adverse Impact Indicators on Entity and Product Level
- Voluntary Principal Adverse Impact Indicators
Consideration of Sustainability Risks
The SFDR requires, at a minimum for all Fund-Managers, regardless of their sustainable ambition, to consider, monitor and disclosure information concerning the firm's policies on the integration of sustainability risks in the investment decision-making process.
Please refer to the articles below to understand what 'substantive' requirements indirectly emanate from this requirement of sustainability risk consideration of the SFDR:
Integration of Sustainability Risks into Remuneration Policy
The SFDR further requires Fund Managers to have a remuneration policy that incorporates the consideration of sustainability risk into the remuneration of their employees (e.g. investment managers).
The following articles allow you to understand what is required from Fund Managers' remuneration policy:
The EU Taxonomy Regulation
The EU Taxonomy Regulation is a classification system that allows investors to prove the sustainable nature of their investors. It is an optional framework that identifies criteria economic activities need to meet to ensure they are sustainable.
The following articles provide an introduction to the framework and the way in which it can be used:
After reading these articles, you should have a good overview of the SFDR and its requirements, and can begin the compliance exercise on 414's SFDR tool!
Want to learn a bit more before diving into the compliance process? Visit this article on 'Background Documents' by clicking on the button below!
