Asset managers should get ready for potential changes to the Sustainable Finance Disclosure Regulation (SFDR), expected to take effect in 2025, Ocorian, a provider of regulation and compliance services, has advised.
The original SFDR, introduced by the European Commission in 2021, aimed to provide retail investors and pension funds with clear, transparent information on the sustainability of investment funds to combat greenwashing.
However, according to the analysts, setting expected disclosures without formal labels has backfired, as categories like Articles 6, 8, and 9 have become de facto labels. Additionally, allowing firms to define terms like “sustainable investments” has led to market confusion, with varied definitions across firms.
After analysing the European Commission’s review of the SFDR in late 2023, Ocorian anticipates several key updates that could significantly impact ESG reporting requirements.
Among the anticipated changes, it has highlighted five key areas of focus. First, the update is likely to require more detailed disclosures on sustainability factors, including how these are integrated into investment decisions and the overall impact of investments.
Second, stronger alignment with the EU Taxonomy for sustainable activities is expected, particularly for products labelled under Article 8 and Article 9, which promote environmental or social characteristics.
Additionally, “sustainability risks” may receive more attention, with asset managers needing to detail how these risks are managed within their portfolios. The regulation might also emphasise disclosures on Principal Adverse Sustainability Impacts, potentially requiring more extensive reporting on how investments affect environmental or social goals.
SFDR: Catalysing ESG integration in the asset management industry?
The firm has also predicted that product labelling under the SFDR could be revised, with new categories introduced to enhance clarity and comparability between products. Efforts are underway to harmonise labelling standards across the EU and UK, making it easier for retail investors to understand a product’s sustainability focus.
While the scope to who the SFDR applies is unlikely to change, the firm shared that it expects broader reporting requirements, potentially impacting financial market participants who don’t currently promote themselves as sustainable. This could include mandatory ESG reporting for all asset managers, regardless of whether their products fall under Article 6, 8, or 9.
The updated SFDR is expected to mandate minimum disclosures covering sustainable risks, which must be reported by default, and require clear justification for any sustainability claims made during marketing.
Potential changes may also affect Principal Adverse Impacts statements, with new reporting templates and a broader range of impacts to consider. Ocorian shared that it anticipates amendments such as expanding social impact indicators, refining PAI disclosures, requiring greenhouse gas emission reduction targets, strengthening compliance with the ‘Do No Significant Harm’ principle, and revising reporting rules for Multi-Option Products.
