More Flexibility, “Less Upfront Pain” for Managers Following SFDR Update

Fewer mandatory principle adverse impacts allow firms to tailor SFDR disclosures; insufficient ESG data remains a problem.

Asset managers face simpler, streamlined requirements under Level 1 of the Sustainable Financial Disclosure Regulation (SFDR), following the release last week of a final report and draft Regulatory Technical Standards (RTSs) by the three European Supervisory Authorities (ESAs).

“We now have fewer mandatory disclosures than were originally proposed, instead allowing for more opt-in disclosures,” Phil Spyropoulos, Financial Services Lawyer at Eversheds Sutherland told ESG Investor. “That gives firms more flexibility and less upfront pain in terms of implementation. It’s streamlining SFDR requirements.”

The number of mandatory principle adverse sustainability impact indicators has been reduced from 32 to 14 for ‘normal’ investee companies. The principle adverse impacts now better take account of the variety of asset classes being invested in by a financial market participant, Spyropoulos explained, allowing for a more tailored approach.

“At the same time, it’s still a very rigorous set of measures,” he added.

The RTSs outline that principle adverse impact investment decisions should be disclosed on the regulated entity’s website with references to an array of specific elements included within their statements: anti-bribery, anti-corruption, respect for human rights, climate and environment, and social and employee matters.

The European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA), in response to the European Commission’s (EC) draft RTSs, said the changes would provide “a more flexible and principles-based approach” rather than “the mere set of indicators disclosed”.

SFDR Level 1 requirements come into force on March 10.

Virginie O’Shea – Firebrand Research Founder and CEO – said there had “already been several calls from regulators and the industry to postpone requirements overall, especially due to the pandemic and pressures related to sustaining business as usual”.

Demand for comprehensive ESG data 

A remaining problem is that asset managers’ compliance with SFDR and the information they provide on green investment vehicles relies partly on the availability of consistent, comparable and reliable information related to underlying assets,

“There are significant concerns in the industry about the lack of data in certain sectors to back up disclosure requirements at the product level. No firm wants to be caught for greenwashing,” O’Shea explained.

The quality and availability of relevant data varies in a number of key areas. These include the three scopes for greenhouse gas emissions which investee companies are expected to disclose against under the Taxonomy Regulation.

ESG data on Scope 3 emissions remains thin on the ground, Spyropoulos noted, which is why firms have an extra year to fulfil the Scope 3 reporting requirements.

He predicted that the short turnaround on reporting requirements for Scopes 1 and 2 emissions (coming into force from January 1 2022) will help “drive the demand for Scope 3 data, and that in turn will make the necessary data available”.

“If you think about the variety of indices and data sources that are available but not easily comparable, it is easy to see why the prescriptive nature of some of the requirements doesn’t correlate too well with the data availability. I would suggest that there is much more direct regulation needed of the data providers themselves first to help to address these issues,” O’Shea noted.

Industry experts have previously expanded on the issue of regulating third party ESG data vendors in order to ensure better quality and consistency of data end-users have access to and ultimately implement in their disclosures.

“I’m sure firms will be analysing the disclosures that they’re going to have to make – where they can source data directly, what they need to buy in and what they’re going to have to estimate,” Spyropoulos agreed.

In January, the ESAs flagged their concerns in an open letter to the EC, asking for more clarification of individual articles – such as the distinction between Article 8 and 9 – ahead of SFDR Level 1 in March. Global law firm Dechert also raised concerns that the SFDR disclosure requirements remain too open for interpretation.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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