Sustainability Risk Reporting

As required by the SFDR (Article 3), entities must design a policy to integrate sustainability risks into the investment decision-making process. This is a Level 1 requirement, which applies to all financial entities irregardless of their sustainability ambitions.

The consideration of sustainability risks usually begins at board-level, since it requires updating the due-diligence and risk management policies and processes. This newly created internal framework must later be included in the website and prospectus disclosures.

For an overview of all SFDR reporting requirements, check this article.

Where to start?

1. Assess the Existing Risk Monitoring Process

Familiarise yourself with your current risk monitoring process. Understand how sustainability risks are identified, assessed, and managed. Determine which data sources, methodologies, and tools are already in use for risk monitoring.

2. Establish a Reporting Framework

The conception of such a framework requires entities to decide on which risk assessment methods to use and at which stages of the investment process.Typically, firms include three to four steps spread across the process.

Example of a Sustainability Risk Disclosure Framework:

• Step 1: Define the scope of your sustainability risk reporting, considering the material ESG risks relevant to your particular investment     activities.
• Step 2: Identify and assess the selected sustainability risks within     your investment portfolio.
• Step 3: Develop a reporting template that covers key risk areas, such as     climate change, governance, social impact, and resource management.
• Step 4: Populate the reporting template with relevant information, including risk descriptions, risk mitigation strategies, and progress updates.
• Step 5: Review and finalise the report, ensuring clarity and transparency in communicating the identified sustainability risks and actions taken.

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3. Align Reporting Objectives with Risk Monitoring

Establish clear links between the identified risks, risk assessment methodologies, and the reporting framework to ensure consistency.

Review the reporting framework requirements and identify the specific reporting elements that your entity must comply with at both entity and product level. Determine which sustainability risk metrics and indicators need to be reported and ensure they align with the existing monitoring metrics.

4. Integrate Risk Monitoring and Reporting Workflows

Determine how data from the risk monitoring process will be transferred and used in the reporting process. Establish clear communication channels between the teams involved in risk monitoring and reporting.

Create reporting templates and formats that align with the reporting framework and capture the relevant sustainability risk data from the monitoring process. Ensure that the templates facilitate the efficient extraction and presentation of data in a clear and standardised manner.

Align the reporting timeline with the existing risk monitoring cycle. Determine when and how frequently sustainability risk reports will be generated based on the availability of data, the reporting framework requirements, and stakeholder expectations. Ensure that reporting deadlines are integrated into the overall risk monitoring timeline.

5. Review, Verify, and Publish the Report

Review the draft sustainability risk report, ensuring that it accurately reflects the data and insights from the risk monitoring process.Once finalised, publish the report, linking it to your existing communication channels and reporting platforms.

Set a periodic review process to ensure your reporting framework is relevant to your evolving needs.

That’s it!

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By following these steps, you ensure a comprehensive and consistent approach to monitoring and reporting on sustainability risks.

414 specialises in assisting financial entities with SFDR compliance. Our tool enables private equity investors to measure all sustainability indicators of their portfolio companies and prepare disclosure documents at both entity and product levels. Additionally, we offer advisory services on sustainability reporting matters and provide tailored guidance throughout the reporting process.

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