Explanation of specific elements
The SFDR prescribes transparency rules. Specific elements of the SFDR may not be entirely clear. We will explain these elements below.
Principal adverse impact statement as the parent company of a group
Financial market participants with an average workforce of more than 500 employees must publish a principal adverse impact statement in all cases. The workforce comprises the employees of the financial market participant itself and those of the subsidiaries within the group. It is irrelevant whether or not these companies are based in the EU.
A parent company only needs to identify the adverse impacts on sustainability factors on the part of the parent company itself in the principal adverse impact statement, and not those of the subsidiaries in the group. However, those subsidiaries that are financial market participants with an average workforce of more than 500 employees are obliged in all cases to publish a principal adverse impact statement about their own business.
Promotion of environmental or social characteristics of a product
All direct or indirect claims, disclosures and reports referring to environmental or social characteristics of a product are regarded as promotion within the meaning of Article 8 of the SFDR. It is irrelevant what means or channel you use for this purpose (digital, hardcopy or other media), and whether this is advertising, product information or information about a sustainability label.
Under the SFDR, ecological or social characteristics are also promoted through the use of words such as ‘sustainable’, ‘sustainability’ or ‘ESG’ in the name of a financial product. In that case, you as the provider must comply with the disclosure requirements laid down in Article 8 of the SFDR.
Provide specific information when promoting sustainability characteristics
If you promote sustainability characteristics of a product, you must substantiate this with specific information, among other things in the mandatory pre-contractual disclosures about the product. The characteristics must also be reflected in the actual investment policy in respect of the product. You must prevent a situation in which consumers have expectations about the sustainability of a product that do not match the actual product. This might be construed as unclear and/or misleading pursuant to the Financial Supervision Act (Wft).
No promotion if only sustainability risks are identified
The mere identification of sustainability risks or the integration of sustainability risks in the investment policy does not constitute promotion. However, under Articles 6 and 7 of the SFDR you do have to identify those risks in the pre-contractual disclosures. A sustainability risk is an environmental, social or governance event that may have a negative impact on the value of an investment.
No promotion in case of mere compliance with ESG legislation
If you simply refer to (national) ESG-related legislation in the product information, without any form of promotion around it, this is not immediately regarded as promotion within the meaning of Article 8 of the SFDR. An example would be a reference to the ban on investing in cluster munitions.
Transparency in case of individual portfolio management and confidentiality safeguards
In case of individual portfolio management, the investment firm must fulfil transparency requirements relating to the portfolio, in accordance with Article 10 of the SFDR. At the same time, an investment firm has an obligation to maintain confidentiality. Where an investment firm uses model portfolios, it can meet the transparency requirements by publishing information about these model portfolios.
Managers subject to the registration regime must comply with SFDR
The SFDR also applies to managers and their collective investment schemes that fall under the registration regime. They must comply with all the requirements.
Managers subject to the registration regime themselves choose the document in which to make disclosures
Managers falling under the registration regime may themselves decide in which document they make the requisite pre-contractual disclosures to (potential) investors. After all, under the AIFM Directive they are not required to issue a prospectus. Managers may also themselves determine in which periodic document they make the requisite periodic disclosures to investors. Under the AIFM Directive, they are not obliged to publish an annual report.
Managers subject to the registration regime must also provide disclosures on their website
Managers must also make the disclosures required under Articles 3,4, 5 and 10 of the SFDR available on their website. Managers who do not have a website will have to set one up.
Managers in third countries must comply with SFDR
The SFDR also applies to managers in third countries that want to enter the market of an EU Member State via a national scheme. These managers have to meet the requirements applicable to the collective investment scheme as well as those applicable to the manager.
More information
The European Commission and the European Supervisory Authorities have published a number of documents containing a further explanation of the SFDR requirements. They can be found here:
• 1st Q&A of the European Commission on the SFDR (14 July 2021)
• 2nd Q&A of the European Commission on the SFDR (30 May 2022)
• Clarifications of the European Supervisory Authorities on the secondary legislation related to the SFDR (2 June 2022)