SFDR: Breaking Down the Level Two Regulatory Technical Standards
Tech-Enabled Reporting is Easy Using the Templates in Annexes 1-5 of the SFDR’s Level Two Regulatory Technical Standards
From January 1, 2023, the “level two regulatory technical standards” (RTS) for SFDR began to apply. This means that in scope asset managers need to begin reporting using the templates included in Annex 1 – 5 of the RTS here.
- Annex 1: Principal Adverse Indicator metrics that in scope entities (those with >500 employees and those who did not actively opt out) must disclose for full year 2022 before June 2023. This template can also be used for product level reporting where applicable.
The remaining Annexes contain the supplementary information required for Article 8 and Article 9 funds:
- Annex 2: Article 8 pre-contractual disclosures (i.e. including how will this fund consider environmental or social characteristics, what is the level of sustainable investment or taxonomy alignment, if any);
- Annex 3: Article 9 pre-contractual disclosures (i.e. including what is the environmental or social objective of the fund, what is the level of sustainable investment, and what is the taxonomy alignment, if any);
- Annex 4: Article 8 ongoing annual disclosure (i.e. including how did the fund meet its environmental or social characteristics, what was the actual level of sustainable investment or taxonomy alignment, if any); and
- Annex 5: Article 9 ongoing annual disclosure (i.e. including how did the fund meet its environmental or social objective, what was the actual level of sustainable investment and what, if any, was the taxonomy alignment).
The information in these templates can also be recorded in the European ESG Template (EET) which is an industry led (voluntary) initiative where asset managers can pre populate the relevant information from Annexes 2-5 in a format that can be passed to their distributors and eventually to the end investor.
Clarity AI is well placed to support financial market participants (FMPs) as these new requirements come in:
- Through Clarity AI’s SFDR module, firms can prepare their product or entity level PAI report. This module also contains a functionality to pre-populate the EET.
- Through Clarity AI’s EU Taxonomy module, users can generate and prepopulate the four annexes (numbers 2-5) for pre-contractual and ongoing disclosure for Article 8 and 9 funds.
- Through its Article 2(17) product, Clarity AI can support FMPs to determine if their investments are sustainable or not under the SFDR definition of Sustainable Investment.
The Level 2 requirements can be difficult to navigate. In fact, in anticipation of their application, we observed some funds “downgrading” from Article 9 to Article 8 status to avoid falling foul of the standards outlined under Article 9. Article 8 standards are also subject to an ongoing consultation by ESMA in an effort to introduce more robust minimum standards for Article 8 funds. This would include, amongst other things, a minimum threshold of 50% of sustainable investment as defined by SFDR Article 2(17) (not 40% as we have seen reported elsewhere). It is therefore as important as ever that financial market participants be able to leverage technology to ensure they can respond fully to the complex regulatory standards outlined in the RTS.