The new Sustainable Finance Disclosure Regulation [SFDR] came into effect in March 2021. This regulation is developed to drive sustainable investment. The SFDR will have big impact on asset managers, banks and fund brokers. In the past months we have published a blog series focusing on the SFDR, the obligations, the timelines, the definitions and the indicators to help you get your head around the subject. And to ensure you are well prepared for the new regulation.
After the publication of the final Regulatory Technical Standards we have updated this and other blog posts in the series to match the new requirements. We will keep doing this in the future to stay aligned with future developments.
In this article we will focus on the Adverse Sustainability Impacts Statement and its implications for Financial Market Participants [FMP’s].
This blog post was first published on November 19, 2020 and updated on April 14, 2021.
SFDR Adverse Sustainability Impacts Statement
On a yearly basis FMP’s need to publish the so-called “Adverse Sustainability Impacts Statement” on their website. This statement consists of seven main elements:
- Details of the assessment of principal adverse sustainability impacts
- Description of policies to assess principal adverse sustainability impacts
- Description of actions to address principal adverse sustainability impacts
- Engagement policies
- Adherence to international standards
- Historical comparison
This element contains, next to the name of the FMP and the reference period of the statement, a summary of the Adverse Sustainability Impacts Statement. The summary text should be published in at least one of the official languages of the home Member State of the Financial Market Participant and, if different, in a language customary in the sphere of international finance (English). This will result in the fact that most FMP’s will need to publish this statement in at least two languages. The summary should have a maximum length of two sides of A4 paper (when printed, the statement must be published digitally).
2. Details of the assessment of principal adverse sustainability impacts
It’s here where the indicators come in. The mandatory indicators are dividend in two main groups: 9 environment related indicators and 5 mandatory social and employee, respect for human rights, anti-corruption and anti-bribery indicators, 2 indicators are related to investments in sovereigns and supranationals and 2 are related to real estate investments.
In addition, FMP’s have to choose at least 2 out of 46 optional environmental and/or social indicators and need to report on those. In total there are 64 indicators of which 18 are mandatory.
Most of the indicators require extensive data collection and calculations. Data needs to be collected from multiple sources or providers. And the datasets which are required go beyond the borders of financial market data. Calculations need to be done and will include vast amounts of (aggregated) data. For example, to calculate the obligatory carbon footprint indicator you’ll need to use is the following formula:
To calculate the above formula you’ll need to have data on:
- The value of your investments in the investee company;
- The market capitalization of the investee company;
- The 1, 2 and 3 carbon emissions of the investee company; and
- The value of all investments done by the FMP.
Especially data on the carbon emissions of the investee company will be likely uncharted territory for a substantial number of FMP’s. In addition, traditional data providers will not always have these types of data although the majority of them are expanding in these areas quickly nowadays.
Regulation 2019/2089 amends regulation 2016/1011 and adds Annex III to this regulation. Based on Annex III the definitions of scope 1, 2 and 3 carbon emissions are:
– Scope 1 carbon emissions are emissions generated from sources that are controlled by the company that issues the underlying assets;
– Scope 2 carbon emissions are emissions from the consumption of purchased electricity, steam, or other sources of energy generated upstream from the company that issues the underlying assets; and
– Scope 3 carbon emissions are all indirect emissions that are not scope 1 or scope 2 emissions and that occur in the value chain of the reporting company, including both upstream and downstream emissions, in particular for sectors with a high impact on climate change and its mitigation
3. Description of policies to assess principal adverse sustainability impacts
This element consists of a description of the policies and practices the FMP uses to identify and prioritise principal adverse sustainability impacts. FMP’s for example need to disclose information on who or which department is responsible for the implementation of the policies, which methodologies are used to assess the individual indicators and a description of the sources and providers of the data that’s being used.
4. Description of actions to address principal adverse sustainability impacts
When adverse impacts are identified, the FMP needs to explain for the next reference period how to avoid or reduce the adverse impacts. In addition, the FMP needs to disclose in this section how measurements, taken in the previous reference period, have contributed to avoid or reduce adverse impacts.
5. Engagement policies
At this section, the FMP needs to publish the following information:
- A brief summary of the engagement policies which are mandatory under Directive (EU) 2017/828 which amends Directive (EU) 2007/36/EC. The directive requires institutional investors and asset managers to disclose an engagement policy that describes how they integrate shareholder engagement in their investment strategy. And it requires them to disclose how their engagement policy has been implemented, including a general description of voting behaviour, an explanation of the most significant votes and the use of the services of proxy advisors;
- Any other relevant engagement policies; and
- An explanation of the reduction in principal adverse impacts achieved of the actions taken during the reference period.
6. Adherence to international standards
Within this element the FMP needs to disclose information on the adherence to responsible business conduct codes and internationally recognised standards for due diligence and reporting and, when applicable, to which extend the FMP and its activities are aligned with the objectives in the Paris Agreement.
7. Historical Comparison
In the first edition of the adverse sustainability impacts statement this section is not relevant yet. From the statement covering the second reference period onwards the historical comparison needs to be included. The historical comparison requires FMP’s to compare the results for the indicators (18 mandatory + 2 optional indicators as a minimum) with the previous reference period. Over time, it is required to make this comparison for no less than 10 years in total which will require FMP’s to carefully manage their (historical) data.
In February 2021, the ESA’s released their final report on SFDR including the draft. It’s assumed that this draft RTS will soon be adopted and become the final RTS, however, changes could still occur. Nevertheless it’s safe to say that this specific disclosure obligation will put quite some pressure on Financial Market Participants when it comes to collecting and managing the necessary data, perform calculations and publishing the statement in multiple languages.
BIQH will continue to monitor any news and updates on the SFDR regulation closely and we’ll inform you via our blog series. In our next blog we’ll take a closer look to the indicators which are part of the Adverse Sustainability Impacts Statement.
We’re always open for a chat and we love discussions, especially when it comes to financial market data. Let us know your challenges, questions and uncertainties relating to the SFDR regulation! Please reach out to me via LinkedIn or send me an e-mail at firstname.lastname@example.org.
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