Breaking down EU Taxonomy and SFDR regulations
The EU Taxonomy and the Sustainable Financial Disclosure Regulation (SFDR) are closely intertwined regulations. Together they affect various stakeholders in different ways. One of whom are Financial Market Participants, or FMPs (i.e. investment firms, asset managers, credit institutions, etc.), who need to disclose details about products sold in the EU as “sustainable” (labeled as article 8 or 9 in the SFDR, see definitions below), on top of their entity-level disclosure requirements.
Navigating Complexity in EU Taxonomy Reporting
The regulatory technical standards (RTS) outlines how FMPs should report the required information using three different templates for product-level disclosures (pre-contractual, periodic and websites) for two separate products (articles 8 and 9). Clearly these standards can be complex. To help demystify these templates we have created a brief list of the main topics addressed:
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- Disclosing to what extent the sustainable (or environmental/social for article 8) objective is being met
- How Principal Adverse Impacts (PAIs) on sustainability factors are considered
- Identifying investments with the highest portfolio weight in the product (or investment strategy for article 8)
- Disclosing the proportion of sustainability-related investments, including the EU Taxonomy alignment (including and excluding sovereigns) and the percentage of transition and enabling activities (or asset allocation for article 8)
- Describing the actions taken to attain sustainable investment objectives during the reference period (or the sustainability performance compared to an index benchmark)
- How the article 9 product performed against the chosen benchmark (or the availability of product specific information online for article 8 products)
Additionally, it is important to note that double counting should be avoided when reporting the total alignment with the EU Taxonomy for article 8 and 9 products. For example, an activity in climate change mitigation can be under the transition activity type but in enabling under the climate change adaptation objective. This should only be counted once, in either of these two activity types when reporting. Clarity AI considers this automatically in their portfolio aggregation calculation.
In fact, our new template report download functionality reduces the time and stress spent on these regulation activities by allowing users to automatically generate the alignment charts and fill out the activity types with one single click, eliminating the need to manually fill it out.
