ESG reporting requirements for fund managers in the EU have taken a significant further step.

On 6 April 2022, the European Commission (EC) formally adopted new standard rules for sustainability-related disclosure for the financial services sector – the Sustainable Finance Disclosures Regulation (SFDR).

The aim of these new regulations is to strengthen investor protection and reduce greenwashing, alongside being able to assess the sustainability performances of financial products. The EC notes:  “Under these rules, financial market participants will provide detailed information about how they tackle and reduce any possible negative impacts that their investments may have on the environment and society in general.”

These new rules come into effect from 1 January 2023 and require a disclosure to be published by 30 June each year.

Europe first required ESG reporting for financial products back in March 2021, though little detail was given at the time on what should be included. These new regulations give specific and complex detail on what should be reported, how, when and to whom. While fund managers and ‘financial market participants’* should already have a disclosure in place and being regularly updated, the SFDR includes a requirement for complex and detailed information you’ll probably not have included in your past disclosures.

According to the SFDR, by 30 June each year, ‘financial market participants’ must publish a separate section on their website called: “Statement on principal adverse impacts of investment decisions on sustainability factors”. The Statement shall cover the 1 January – 31 December period of the previous year. This must be kept up to date and clearly mention date of publication and dates of updates.

The SFDR specifies the exact content to be disclosed, along with methodology and rules on presentation. The Regulation is 50 pages long and is complemented by five separate annexes providing templates to be used for the disclosure. Templates under each Annex are around 6 pages long.

Some points we noticed:

  • The SFDR includes a requirement for financial market participants to include disclosure information at the pre-contract stage (SFDR Articles 14, 15 and 16).
  • Articles 23–49 of the SFDR go into detail on each required section of the disclosure. The disclosure must be drafted in one of the official languages of the home Member State of the financial market participant. If the financial product is also sold in another Member State, the document must also be drafted in an official language of that State. (Article 5)
  • Going forward, disclosures should include reference to historical data, up to the last five periods. 2024’s disclosure should include reference to 2023’s data, and so on. Disclosures made in 2028 should include historical data from all reports, starting from the first disclosure in 2023. (Article 64)
  • Further, financial advisors must disclose when they consider principal adverse impacts in their advice – and when they don’t.

Annex I Table 1 must be included in the disclosure, and the Regulation document goes through the section requirements one by one.

Annex II provides the template for pre-contractual disclosure under Article 15 of the SFDR. Article 17 of the SFDR gives information on how to calculate the degree to which investments are in environmentally sustainable economic activities.

Annex III is the template for outlining the sustainable development objective of the financial product, with reference to international standards. (SFDR Articles 18–21)

Annex IV is the template for giving information on the environmental and/or social characteristics of the investment/product, under Articles 50–57 and Article 65.

Annex V is the template for detailing sustainable development objectives, covered in Articles 58–64.

All the documents can be found in full on the EC website. Along with the templates, the Annexes include formulae to calculate greenhouse gas emissions (GHG), carbon footprint and ‘GHG intensity of investee companies’.

Managers marketing and investing in the EU should be preparing provide this disclosure. Even though the current reporting year is still underway, the disclosure templates are highly detailed and will take time to prepare. Getting data-gathering procedures in place now will pay dividends going forward.

Non-EU clients should get advice on whether they should be also completing the disclosure. For example, if any management or advisory duties provided to EU-based firms, contractual obligations may specify a requirement to adhere to EU rules.

While the new reporting requirements of the SFDR will no doubt present fund managers with a challenge, they also offer the opportunity to both test and adjust your firm’s ESG alignment, as well as providing your investors with transparency and assurance of your focus on sustainability and ESG practices.

Auxadi is a specialist provider of tailored fund services, supporting you with the corporate management of your investment structures.

From international accounting, tax and payroll service, through to complying with regulatory and legal requirements such as the SFDR – Auxadi are the ideal partner with specialist expertise on the ground in over 50 key financial markets across the globe.

*Financial market participants are defined as: “asset managers, institutional investors, insurance companies, pension funds, etc., all entities offering financial products where they manage clients’ money.”

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Founded in 1979, Auxadi is a family-owned business working for multinational corporations, private equity funds and real estate funds. It’s the leading firm in international accounting, tax compliance and payroll services management connecting Europe and the Americas with the rest of the world, offering services in 50 countries. Its client list includes many of the top 100 PERE companies. Headquartered in Madrid, with offices in US and further 22 international subsidiaries, Auxadi serves 1,500+ SPVs across 50 jurisdictions.

All information contained in this publication is up to date on 2022. This content has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this chart without obtaining specific professional advice.No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this content, and, to the extent permitted by law, AUXADI does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this chart or for any decision based on it.