European Union Sustainable Finance Disclosure Directive
The EU SFDR was created as part of the Union’s response to its obligations under the Paris Agreement signed in December 2015. The SFDR is a fundamental pillar of the EU Sustainable Finance agenda, having been introduced by the European Commission as a core part of its 2018 Sustainable Finance Action Plan, which also include the Taxonomy Regulations. The main purpose of the regulation is to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants. Although ARIA does not fall ‘in-scope’ under the current regulations (i.e. it has less than 500 employees) we still see value in voluntarily complying with the regulations as part of our journey to financing decarbonising the global economy and delivering positive social impacts. Funds can choose to align themselves with 1 of 3 Articles under the regulation, with each article bring more obligations to investors and regulators in both terms of sustainable focus and transparency requirements.
ARIA funds will target to achieve Article 9 reporting whenever possible. If Article 9 cannot be achieved, we will comply with Article 8, and strive to upgrade processes to achieve Article 9 status in the long run. Article 6 funds will not be considered as the largely disregard positive ESG outcomes.
4.1 Article 9 Requirements
Funds dedicated as Article 9 of the SFDR have a sustainable investment objective and require the highest levels of due diligence, data collection and transparency. In order to achieve this ARIA requires clear policies on data collection, assessment, storage and reporting. How the sustainable investment is achieved How the sustainable investment is benchmark and measured. This may be against an index (in which case the index needs to be justified against the objective along with methodology) or if there is no benchmark then there needs to be an explanation to how the objective will be met.In cases where a reduction in carbon emissions is the objective, it should be disclosed on how this aligns with the long-term objectives of the Paris Agreement.
Article 9 stipulates that there needs to be mandatory disclosures on:
4.2 Article 8 Requirements
Funds dedicated as Article 8 of the SFDR promote environmental characteristics and have a wide scope of how to meet those objectives through due diligence, data collection and transparency.
Article 8 provides wider scope for investment managers to promote environmental characteristics, either through screening or impact which has an impact on the level of disclosures on
How the sustainable investment is achieved
How the sustainable investment is benchmark and measured. This may be against an index (in which case the index needs to be justified against the objective along with methodology) or if there is no benchmark then there needs to be an explanation to how the objective will be met.
In cases where a reduction in carbon emissions is the objective, it should be disclosed on how this aligns with the long-term objectives of the Paris Agreement
4.3 Principal Adverse Impacts
Principal Adverse Impacts (PAI) form an important part of the SFDR in that they obligate fund managers to report not just the positive, but also the negative impacts of an investment. As part of our commitment to prevent greenwashing, Investment managers should consider all aspects to the impact of an investment, in compliance with the PAI guidelines. PAIs are designed to capture negative, material, or potentially material effects on sustainability factors that result from, worsen, or are directly related to investment choices. For example, an investment leading to increased net GHG emissions. The Reporting Technical Standards developed by the European Standards Authorities (ESA) set out the reporting, disclosures and methodologies for PAI disclosures under SFDR. ARIA will follow these guidelines and report as per the requirement as set out in Annexes I and II. Disclosure on how PAI are integrated into the investment decisions (Article 7 of SFDR for all funds)Disclosure on how the fund includes ESG characteristics in their decision-making process, policy and benchmark used, any related index calculation methodologies (for Article 8 of SFDR funds)
Statements with respect to PAIs must be made on
i. website. The statement should disclose how an investment manager includes PAIs in its investment analysis and decision-making process. This document will form a key part of that disclosure. In order to identify sustainability linked goals the ESA have set out 14 mandatory indicators, which need to be included in the investment decision making process, split into 9 environment or climate linked and 6 linked to social impacts. In addition at least 1 additional voluntary social and environmental goal needs also to be taken into account
ii. Pre-contractual and periodic disclosures. In addition to the website statements Investment managers should make pre-contractual and periodic statements on its website at a product level. These include
In addition, there is an expectation of compliance with Article 13 of SFDR in all of it marketing materials, outlining alignment with SFDR and EU Taxonomy. Reporting against PAI indicators is standardised and are set out in Annex I of the RTS document.
4.4 Obligations on disclosures
Depending on the designation of the fund under the Articles, certain pre-contractual, periodic and website disclosures need to be made in order to comply with the regulations. Disclosures will be reviewed before any fund launch and at least on a yearly basis under the guidance of the Chief Sustainability Officer.
4.5 Alignment to EU Taxonomy
The EU Taxonomy is a classification system for environmentally sustainable economic activities. It is integrated into the SFDR, specifically article 8 or 9. The taxonomy covers environmentally and/or socially sustainable investments and ARIAs Article 8 & 9 funds will include alignment to the Taxonomy in their periodic reporting. Taxonomy reporting relates to expenditure or revenue of an investee company to one of six activities which are deemed as sustainable by the EU. These are:
1.Climate change mitigation
2.Climate change adaptation
3.Sustainable and protection of water and marine resources
4.Pollution prevention and control
5.Protection and restoration of biodiversity and ecosystems
6.Transition to a circular economy
The alignment should be expressed as % in turnover, capex and opex as per the guidelines. This should be assessed at a project-level basis using pro-forma reports based off formulas set out in the regulation. It should be noted that some projects may contribute to more than one activity. If a project is assessed to not fit any activities above, or if it is assessed to do significant harm to any of the 6 activities, then it will not be eligible for financing or an investment by us. The fund management and sustainability team, will assess eligibility against the Technical Screening Criteria set out by the European Commission in the relevant legislation.
4.6 Measuring and Recording Data
An Alternative Investment Fund Manager (AIFM)has the regulatory responsibility to report SFDR and Taxonomy alignment.. In order for reporting to align with Paris Agreement, data will also need to be collected with respect to greenhouse emissions. At ARIA, we as a team recognise, that data does more than just allow us to fulfil our obligations to our investors, shareholders, or regulators. By analysing data, we can constantly look for improvements across our sustainability and impact goals and engage in more informed decisions.