SFDR: Product Level Disclosures

A Brief Recap of the SFDR

The Sustainable Finance Disclosure Regulation (SFDR) came into effect on March 10, 2021 and stands as a core pillar of the European Green Deal’s Sustainable Finance Action Plan. It is designed to improve transparency around sustainability claims in the financial market, aiming to prevent greenwashing and encourage the flow of capital towards sustainable investment choices, businesses, and products. All financial market participants (FMPs) and financial advisors who operate in the EU, or market to clients in the EU, fall under the SFDR’s reporting mandate. For detailed information on the SFDR’s fundamentals, see our previous blog article “SFDR Fundamentals, Challenges and Keys to Success”.

Product Level Disclosures: Insights into the Sustainability of Funds and Other Financial Assets

Product level disclosures give stakeholders better insights into the sustainable reality of the funds and other financial assets they engage with. The SFDR facilitates greater transparency and comparability among financial institutions and their products by requiring disclosures of relevant sustainability information.

These disclosures include the integration of sustainability risks in investment decisions, investment decisions’ adverse effects on sustainability, and alignment with the EU Taxonomy. A key distinction made in these disclosure requirements is the separation of entity level disclosures from product level disclosures. Not only are financial market participants obligated to disclose information about their sustainability practices as a whole, they must also disclose information about each product that they market to clients in the EU.

Financial Product Classifications Under the SFDR

The SFDR classifies financial products into three categories as described in Articles 6, 8, and 9 of the legislation.

Entity level disclosures and product level disclosures differ in the channels through which they are published. Entity level disclosures are provided on the entity’s website. Whereas product level disclosures are made in pre-contractual documentation (e.g., brochures), periodic reports and/or website disclosure. 

The European Supervisory Authorities (ESAs) have developed Regulatory Technical Standards (RTS) templates outlining the information that needs to be disclosed through each channel. The first RTS release was published in February 2021, the second RTS release, including templates for pre-contractual reporting and periodic reporting, in October 2021, and the third RTS release, including the template for PAI reporting, in April 2022.

The table below shows a breakdown of the SFDR disclosure requirements, products impacted, and disclosure type.

Pre-Contractual Disclosures at Product-level

In pre-contractual disclosures, the FMP must report on the integration of sustainability risks and principal adverse impacts (PAIs) for each Article 6, 8, and 9 product. FMPs are not obligated to consider PAIs in their investment decisions for Article 6 products. Further, FMPs with less than 500 employees are exempt from the obligation to consider PAIs for Article 8 and 9 products, as well. If an FMP does not consider PAIs for a product, they must explain why. 

Article 8 and 9 products require additional disclosures. For these products, FMPs must report on the EU taxonomy alignment of the products’ contents in addition to the requirements applicable to all product types. The FMP must also disclose information on the products’ environmental and social characteristics for Article 8 products, and information on obtaining the products’ objectives for Article 9 products, as well as the methods of measuring and monitoring these points of information for both. For more detail on these disclosures, see the figure provided below.

Periodic Disclosures at Product-level

In periodic reports, similar to pre-contractual disclosures, the FMP must report on the integration of sustainability risks and PAIs for all products (starting in 2023). Similarly again, FMPs that are exempt from the obligation to integrate PAIs into their investment decision making must either comply anyway, or explain why they do not integrate PAIs.

Article 8 and 9 products again require further disclosures. FMPs must report on the extent to which the environmental and social characteristics measured and monitored for Article 8 products are met; for Article 9 products, information on achieving the products’ objectives. Additionally, a comparison of the products’ impact with that of a designated index must also be disclosed for Article 8 and 9 products where a designated index is used (see previous figure). Finally, information on the EU Taxonomy environmental objectives and ‘do no significant harm’ criteria must be disclosed. Here, it is important to ensure that no double counting occurs between environmental objectives when calculating EU taxonomy alignment at either the asset or financial product level.

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