The Sustainable Finance Disclosure Regulations (SFDR) is an emerging European policy framework for sustainability disclosures that went live on 1 January 2023. We have collected our interpretation of the emerging SFDR requirements and what that means for venture funds.
Note, it is a complex policy initiative that has been delayed several times and there are many unknowns that the European Commission and associated stakeholders are still working through.
Not withstanding that things may change after we publish this, we are not lawyers or policy experts and this should not be considered as legal advice!
One way to think about SFDR, is the different reporting categories and the requirements specified for each:
entity-level (ie at the firm level) principal adverse impact reporting
Principal adverse impacts are a key concept in SFDR. They are considered the universe of the most material sustainability-related risks concerning environmental, social and governance matters. Assessing risk likelihood and reporting data against these are a central part of SFDR.
Reference period ie a benchmark, typically the first, or proceeding, year’s performance of the fund.
Entity-level principal adverse impact reporting
What’s required?
Reporting performance data on specific indicators (similar to ESG metrics) that can be found in the template (see below)
Qualitative elements including:
A summary
Relevant policies
Actions and mitigation strategies
Adherence to international standards
Historical comparison covering five reference periods
As noted in the Final Report on draft Regulatory Technical Standards (published 2/2/2021): By 30 June each year, financial market participants shall publish the information referred to in paragraphs 1(a), 2, 3 and 4 of Article 4 of Regulation (EU) 2019/2088 and this Section [section 1, p. 23 of the RTS] on their websites in a separate section titled, ‘Principal adverse sustainability impacts statement’ located in the same part of the website as the section referred to in Article 31.
In the first year, no reference period information is required. In the second year, a reference period is required.
Anything else?
Keep any published information up to date.
Include date of publication of the information and clearly identify any updated text with the date of the update
Where that information is presented as a downloadable file, indicate the version history in the file name.
Product-level pre-contractual disclosures
What's required?
You must include information in line with the given template (see below). This includes information on:
Objectives of the fund and whether aligned with Article 8 or Article 9
Investment strategy
Relevant indicators to track performance
Alignment of targeted investments and the fund’s goals
Investment strategy and proportion of portfolio that will align with different categories of impact
Benchmarking information on impact performance
Is there a template?
Yes (see here for Article 8 environmental and social characteristics and here for Article 9 sustainable investment objective).
Note: SFDR documents (Article 6 in Regulation 2019/2088) require that ‘transparency of the integration of sustainability risks’ be included in pre-contractual disclosures, although it is not clear where this should be reported in the template.
How often do I have to do this?
Once, in the pre-contractual disclosures, but they have to be kept up to date.
What about a reference period?
No reference period data required.
Product-level website disclosures
What's required?
A disclosure statement on the website referencing the product’s sustainability profile. This should include:
Sustainability-related objectives of the product and whether they are aligned with Article 8 or 9
Investment process and sustainability-related elements and policies (in particular focusing on sustainability risk policies)
Any data sources used to inform decision-making (eg to estimate impact or create benchmarks)
Screening criteria
Whether and how principal adverse impacts are considered
Disclosure on how the product complies with the ‘do no harm’ principle
Disclosure on alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights
Is there a template?
No.
How often do I have to do this?
Once, but information must be kept up to date.
What about a reference period?
No benchmarking data needs to be included here.
Anything else?
SFDR documents (Article 5 in Regulation 2019/2088) also state that there should be ‘transparency of remuneration policies in relation to sustainability risks’ on the website. However, there is little guidance as to how to approach this and whether that exists at product level or entity level.
Product-level periodic disclosures
What's required?
You must include information in line with the given template (see below). This includes information on:
Objectives of the fund, whether aligned with Article 8 or Article 9, and whether they are being met
Relevant indicators to track performance and performance against those
The degree to which investments met the ‘do no harm’ principle
Whether and how principal adverse impacts were considered
Identifying the 15 largest investments and the breakdown of assets by categories of sustainability
Benchmarking data and relative performance
Is there a template?
Yes (see here for Article 8 environmental and social characteristics and here for Article 9 sustainable investment objective).
