SFDR: update on the European regulation

SFDR today

Where the CSRD* (which we told to you about here) provides a framework for the sustainability reports of non-financial companies, the SFDR applies to investment companies, portfolio managers and banks. These are required to publish information on the sustainability of their financial products and to classify their funds according to various sustainability criteria.

In short, financial products are divided into 3 categories:

• Article 8 funds must promote ESG characteristics and take them into account in the investment process,
• Article 9 funds must have a sustainable investment objective,
• Article 6 funds do not meet the requirements of Articles 8 and 9 and do not incorporate sustainability criteria or objectives.

For products meeting the criteria set out above, certain information must be included in the company’s annual report:

• a risk policy linked to ESG issues indicating how these criteria influence investments and the returns on company assets. Each risk must be detailed in terms of sustainability in the company’s activities and indicate the actions put in place to address it,
• a negative impact policy on sustainability factors specifying how companies negatively impact the environment as well as the social domain. To do this, companies must first indicate how negative impacts are identified and measured. Then, they must summarize this data according to certain key indicators (or PAI*),
• a remuneration policy taking into account aspects of sustainability and describing how environmental and social criteria are integrated into the calculation of remuneration for employees and managers.

Regulatory evolutions for tomorrow

Today there is talk of imposing ESG criteria for all types of products in order to encourage companies to invest in sustainable finance, to guarantee more transparency and comparability between these companies and not to penalize “good students”.

To achieve these objectives, a consultation launched by the European Commission is underway. You can submit your responses by December 15 (find the targeted consultation here and the public consultation here).

SFDR & EU Taxonomy

The taxonomy regulation also clarifies the SFDR by allowing, thanks to various environmental indicators, to determine whether an economic activity is a sustainable investment or not.

This European taxonomy (or so-called “green taxonomy”) is also currently being reviewed, we will tell you more about it soon!

Focus on France and the ISR* label

Alongside these European developments, in France, the Ministry of the Economy announced on November 7, 2023 that funds investing in companies carrying out new exploration, exploitation or refining projects linked to hydrocarbons will no longer be able to claim the ISR. According to Morningstar, around 45% of the 1,200 labeled funds will therefore have to modify the composition of their portfolios, at the risk of losing their label.

*Glossary

CSRD: Corporate Sustainability Reporting Directive

ISR: “Investissement Socialement Responsable” (or “Socially Responsible Invesment”), French label that aims to reconcile economic performance and social and environmental impact by financing companies that contribute to sustainable development.

PAI: Principal Adverse Impact, defined in the technical norms (RTS) of the SFDR

SFDR: Sustainable Finance Disclosure Regulation