ESG: SFDR’s “Article 10” website disclosures

ESG: SFDR’s “Article 10” website disclosures

To state the obvious, the EU’s Sustainable Finance Disclosure Regulation (SFDR) has received immense attention from the financial sector in the past year.  The multifaceted regime requires firms to make disclosures in a number of different situations, in varying formats, with staggered effective dates, and pursuant to numerous legislative and regulatory texts (some of which are still in draft form or awaiting approval from EU authorities).  And of course the Taxonomy Regulation, which in part amends SFDR, has made these challenges even more complex.

Here we’ll narrow our focus to SFDR Article 10, which requires that market participants publish on their websites sustainability information about their “Art. 8” and “Art. 9” financial products.  As investment managers and others familiar with SFDR are by now aware, those are funds that have certain ESG characteristics (Art. 8 or “light green” products) or else that make ESG attributes their objective (Art. 9 or “dark green” products).  These products are subject to ESG disclosure requirements within pre-contractual statements (e.g. prospectus) and periodic reports (e.g. annual report), according to proposed regulatory technical standards (RTS) and prescribed templates. 

That RTS[1] also sets forth what firms must disclose about those products on their websites, in other words how to satisfy SFDR Article 10:

“Article 8” products

(a) Summary

(b) No sustainable investment objective

(c) Environmental or social characteristics of the financial product

(d) Investment strategy

(e) Proportion of investments

(f) Monitoring of environmental or social characteristics

(g) Methodologies

(h) Data sources and processing

(i) Limitations to methodologies and data

(j) Due diligence

(k) Engagement policies

(l) Where an index is designated as a reference benchmark for the purpose of attaining the environmental or social characteristics promoted by the financial product, ‘Designated reference benchmark’

“Article 9” products

(a) Summary

(b) No significant harm to the sustainable investment objective

(c) Sustainable investment objective of the financial product

(d) Investment strategy

(e) Proportion of investments

(f) Monitoring of sustainable investment objective

(g) Methodologies

(h) Data sources and processing

(i) Limitations to methodologies and data

(j) Due diligence

(k) Engagement policies

(l) Attainment of the sustainable investment objective

Although the RTS doesn’t provide a template to follow, it elaborates further on what each of the above-listed topics must encompass, and therefore it should be read closely by firms that are in scope.  The effective date for this required “Level 2” RTS adherence to Article 10 is 1 January 2023, in line with many other aspects of SFDR. 

Currently, during the period of “Level 1” Article 10 compliance (since 10 March 2021), firms are posting their disclosures under a variety of approaches.  Some are addressing Article 10 in a general sense (describing for example their assessment methodologies, and their products’ sustainability features), while remaining cognizant that the text of Article 10 requires disclosure “in a way that is accurate, fair, clear, not misleading, simple and concise and in a prominent easily accessible area of the website”.  Other firms are conforming more closely to the RTS-mandated topics, clearly delineating and addressing each of them.  Website placement also varies: some disclosures are made accessible on a financial products web page (i.e. list of funds), others on a sustainability or ESG page, and still others on a page dedicated to disclosures or reporting.  During the remainder of 2022, and during the RTS effective period in 2023, it’s likely that more firms will coalesce toward a more uniform type of Article 10 disclosure, adhering to the RTS requirements.

Finally, it’s worth noting that much of the same information required to be published under Article 10 is already subject to SFDR disclosure under different circumstances (for example as mentioned above, in pre-contractual and periodic disclosures).  Therefore a goal for firms should be to replicate this common information to the extent possible, for website publication and in conjunction with other required website disclosures under SFDR.  Such additional disclosures are most often required at entity level (unlike Article 10 disclosures which are at product level), including consideration of sustainability risks in investment decisions (SFDR Article 3), principal adverse impacts on sustainability (SFDR Article 4) and integration of sustainability risks in remuneration policies (SFDR Article 5).  Market participants will note that firms have been addressing these additional matters on their websites, to varying degrees, since their Level 1 application started on 10 March 2021.  (While Level 2 RTS compliance will be required for principal adverse impact statements starting on 1 January 2023, no RTS is planned for the Article 3 or Article 5 disclosures.)

For more information or to speak with a regulatory expert, please email info@cssregtech.com.

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[1] The European Supervisory Authorities (ESAs) proposed the relevant RTS in a Final Report dated 2 February 2021, with Articles 31-57 of the RTS covering SFDR Article 10 requirements.  For avoidance of confusion, note that other portions of the RTS are proposed to be amended, to cover certain SFDR provisions added by the Taxonomy Regulation (additional sustainability information required in pre-contractual and periodic reports), as addressed in the ESA’s separate Final Report dated 22 October 2021.

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