Sustainable Finance Disclosure Regulation (SFDR)

Background

The EU Sustainable Finance Disclosure Regulation (SFDR) ((EU) 2019/2088) was published in the Official Journal in December 2019 and forms part of the wider EU Renewed Sustainable Finance Action Plan, to introduce standardised reporting requirements for financial market participants. The regulation sets out product level, as well as entity level disclosure requirements ‘with regard to the integration of sustainability risks and the consideration of adverse sustainability impacts… and the provision of sustainability‐related information with respect to financial products’ (Article 1). It is important to note that many requirements will be mandatory for firms identified in the regulation as ‘financial participants’ regardless of whether they offer ESG related products, or whether they have individual sustainability objectives.

Overview

The regulation impacts financial market participants such as Alternative Investment Funds (AIFs), Undertakings for the Collective Investment in Transferable Securities (UCITS), investment firms, and credit institutions offering portfolio management services.

All in-scope financial market participants and advisors will be required to:

• Publish detailed policies on their website regarding the integration of sustainability risks in their investment decision‐making process.
• Publish detailed policies on their website regarding the integration of sustainability risks in their investment advice.
• Provide transparency via pre-contractual disclosures on the integration of sustainability risks in their businesses.
• Where a financial product has sustainable investment as its objective, firms must abide by pre-contractual transparency rules.

Key Articles for Impacting Securities Lending

• Article 3: Transparency of sustainability risk policies
• Article 4: Transparency of adverse sustainability impacts at entity level
• Article 8: Transparency of the promotion of environmental or social characteristics in pre‐contractual disclosures
• Article 9: Transparency of sustainable investments in pre‐contractual disclosures

When Will It Apply?

Entry into force of the high-level principles outlined in the Level 1 text for the majority of requirements will apply from 10 March 2021.

From 30 June 2021, firms with more than 500 employees will have the requirement to publish and maintain on their websites, a statement on due diligence policies regarding adverse impacts of investment-decisions on sustainability factors.

From 1 January 2022, firms will be required to report periodic disclosure requirements for products that have environment or social characteristics or that promote sustainable objectives.

In October 2020, the Level 2 RTS release was postponed due the unprecedented levels of market stress caused by the pandemic, as confirmed in a letter from the European Commission.