EU’s Sustainable Finance Action Plan are relevant for asset managers, pension funds, banks and insurers, among others. There will also be sustainability indicies developed for better benchmarking and comparability of investment strategies and funds.
EU Sustainable Finance Disclosure Regulation
The EU Sustainable Finance Disclosure Regulation (SFDR) is a new set of EU rules for increased comparability and reduced greenwashing among financial products. The regulation will increase the information available for investors about both the potential positive and negative impact of their investments and the related ESG risk.
The new disclosure regulation is, together with the above mentioned Sustainable Action Finance Plan a crucial part of the EU’s Sustainable Finance Framework and European Green Deal. The SFDR sets out strict criteria for the classification of funds that defines itself as sustainable. These criteria er described in the regulation’s Articles 6, 8 and 9.
- Article 9 funds, also known as ‘products targeting sustainable investments’, covers products targeting bespoke sustainable investments and applies “… where a financial product has sustainable investment as its objective.”
- Article 8 funds, also known as environmentally and socially promoting’, applies “… where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.”
- Article 6 covers funds that are not Article 8 or 9, however sustainability may still be part of the portfolio manager's process, e.g. by assessing the sustainability risk. Note that this category covers all other products and will as a consequence include everything from funds that report sustainability as not relevant to funds that have good integrations of sustainability – only not as defined by the SFDR (for example, an index fund that excludes the worst companies from an ESG perspective).