Start preparing for disclosures under the new SFDR Delegated Regulation

What will the Delegated Regulation mean for you?

The SFDR requires financial market participants (such as banks, investment firms and pension funds) and financial advisers to disclose information on how they have embedded ESG considerations into the financial products they offer or advise on. By specifying the exact content, methodology and presentation of the disclosures required, the Delegated Regulation will improve the quality and comparability of this information. Under these rules, financial market participants and financial advisers will have to provide detailed information on how they are tackling and working to reduce any adverse impacts their investments may have on the environment and for society in general.

The Delegated Regulation sets out rules on:

1. transparency about adverse impacts on ESG factors;
2. pre-contractual product disclosures;
3. website product disclosures; and
4. product disclosures in periodic reports.

The rules on transparency include various detailed requirements for disclosing the impact on environmental and societal topics (e.g. employees, human rights, anti-corruption and anti-bribery).

The pre-contractual product disclosure rules cover the presentation of ‘Light Green’ and ‘Dark Green’ products. The ‘Light Green’ regime in Article 8 SFDR relates to financial products that promote environmental or social characteristics, while the ‘Dark Green’ regime in Article 9 covers financial products with a sustainable investment as an objective. Financial products with sustainable investment options are subject to their own pre-contractual rules.

Product disclosures on a website should be published under prescribed headings, including a summary, investment strategy, use of methodologies, monitoring and, if applicable, reference to a benchmark. The Delegated Regulation includes separate disclosure rules for Light Green and Dark Green products on websites.

Lastly, the Delegated Regulation provides templates for periodic disclosures regarding financial products in Annexes 4 and 5.

Action required by financial market participants and financial advisers

The publication of the Delegated Regulation provides more insight into the European regulators’ expectations for sustainable products disclosures. Financial market participants and advisers should now start preparing to apply the SFDR and the Delegated Regulation. The Regulation is scheduled to apply from 1 January 2023, and so there is little time to lose. The first Principal Adverse Impact (PAI) statement for 2022, including the indicators laid down in the Delegated Regulation, should, for example, be published by 30 June 2023. For a full overview, see the timetable in the updated statement.