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Sustainable Finance Disclosure Regulation (SFDR)



Introduction to SFDR

The Age of Sustainability is supplanting the 200-year-long Era of Carbon. The financial services industry, partly by choice and partly by regulatory edict, is helping to facilitate the transition.

The European Union wants palpable action on climate change. It is determined to secure net-zero carbon emissions by 2050. It wants to outlaw greenwashing. In pursuit of these policy objectives, it is establishing the Sustainable Finance Disclosure Regulation (SFDR).

According to the EU, SFDR “lays down sustainability disclosure obligations for manufacturers of financial products and financial advisers toward end-investors.”[1]

The EU officially adopted SFDR in 2019, with Level 1 disclosures becoming mandatory in March 2021.

This page answers the key questions about SFDR and outlines how asset managers, insurers, pension funds, advisers and all other entities that manage client money are expected to comply.

Q1. What is Sustainable Finance Disclosure Regulation (SFDR)?

A1. A European regulation that applies to financial markets participants and financial advisers and to their products. It requires them to classify their products into one of the different categories according to the extra-financial characteristics they want to disclose and to issue the relevant disclosures mandated by that category.

Q2. Who is impacted?

A2. Financial markets participants and financial advisers are in scope of SFDR as well as funds distributed in the EU and mandates signed by an EU-based entity.

Q3. How much time have we got?

A3. Not much. Level 1 has been in place since March 2021, and Level 2 will be in force in January 2023.

Q4. What is the policy objective?

A4. To prevent greenwashing and to increase the comparability of products on sustainability features.

Q5. What about Brexit?

A6. SFDR does not apply to products distributed in the UK. In January 2022, however, the UK will open a high-level consultation on its own set of obligations under the banner title Sustainability Disclosure Requirements (SDR).

Core SFDR: levelling the green playing field

SFDR creates a systematic, transparent and comparable approach to sustainability within financial markets. Almost all financial products are covered and almost all financial market participants are obliged to disclose the information requested. As such, you may see references to disclosures at the “product level” and the “entity level”.

Two concepts, Sustainability Risk and Principal Adverse Impacts, lie at the core of SFDR. They aim to capture the cross-impacts that a financial products and the broader environment have on one another. In lay terms, they are about managing financial risk posed by extra-financial factors (e.g. a flood) and limiting the harm done by the investment on the broader environment. Together, they are referred to as the double materiality concept.

Sustainability Risk

Financial market participants and advisers must identify environmental, social and governance (ESG) issues that could cause the value of investments to fall. They must also outline how they are reducing sustainability risks.

For example, an investment fund may own a stake in a steel producer. Pressure from customers and regulators may demand that the company spends more to reduce carbon emissions. That is a “sustainability risk” which is likely to increase operating costs and decrease returns for investors.

Equally, spending on a plant that lowers greenhouse gas emissions is likely to bring sustainability benefits that decrease the risks to the natural environment.

Disclosure, meanwhile, helps investors and other financial market participants assess the trade-offs. They may conclude that it is worth paying for lower sustainability risks by accepting lower investment returns.

Appropriate disclosures arise from operations worldwide, across asset classes and product type.

Principal Adverse Impact

Financial market participants and advisers must assess the potentially harmful ramifications of their behaviour for the environment and society. They must also explain the effect on the financial products they manufacture and/or promote.

SFDR obliges firms to identify investment decisions and financial advice which might “cause, contribute to or be directly linked to negative material effects on environment and society.” Adverse impact statements have to be made regardless of whether sustainability considerations form part of the stated investment strategy.

For example, an investment fund may own a stake in an onshore windfarm. While the installation has strong renewable energy credentials, there may be ramifications such as disruptions to the appearance of an otherwise unspoiled stretch of landscape or adverse impacts on flora and fauna.

Principal Adverse Impact Statements (PAIS) must be prepared and published annually. Participants should be aware of overlaps and interconnections with other statutes including Undertakings for Collective Investment in Transferable Securities (UCITS) and the Alternative Investment Fund Managers Directive (AIFMD).

Definitive Articles 8 and 9

SFDR applies to both financial market participants and financial advisors as entities and to the financial products they manufacture or advise on. The disclosure regime applicable to products depends on the classification of that product within the framework of SFDR:

  • Products that have a sustainable investment objective fall under Article 9 of SFDR and have to comply with the relevant disclosure regime;
  • Products that promote Environmental or Social characteristics fall under Article 8 of SFDR and have to comply with the relevant disclosure regime;
  • Lastly products that fall under neither have a much lighter disclosure regime.



Article 8 disclosures

Financial products that “promote Environmental or Social characteristics” must comply with the disclosure regime mandated, among other things, by the Article 8 of SFDR. This includes:

  • A dedicated pre-contractual disclosure (standardized in an EU-wide template as of 2023) where amongst other all the environmental and/or social characteristics are laid down;
  • A dedicated webpage, where amongst other the commitments are summarized and additional information on the methodologies applied to the product is provided;
  • Disclosures in the periodic report (standardized in a common EU template as of January 1st, 2023) where the actual environmental and social performance of the financial product is measured.

Article 9 disclosures

Financial products that “have sustainable investments as their objective” must comply with the disclosure regime mandated, among other things, by the Article 9 of SFDR. This includes:

  • A dedicated pre-contractual disclosure (standardized in an EU-wide template as of 2023) where the strategy to deliver the sustainable investment objective are laid down;
  • A dedicated webpage, where the commitments are summarized and additional information on the methodologies applied to the product is provided;
  • Disclosures in the periodic report (standardized in a common EU template as of January 1st, 2023) where the overall sustainability impact of the financial product is Indicated by means of relevant sustainability indicators.

Other disclosures

Financial products that do not fall under Article 8 or Article 9 of SFDR have a lighter disclosure regime: they only need to make a few explicit statements in their existing documentation (prospectus and periodic reports) about whether or not they:

  • Consider Sustainability Risks;
  • Consider Principal Adverse Sustainability Impacts;
  • Follow the criteria laid out in the European Green Taxonomy.

Financial market participants and financial advisors also have to publish an entity-level report as of June 2023, the Principal Adverse Impact Statement, where they must describe the policies they have in place to mitigate the negative externalities of their investments as a firm and annually publish a set of indicators measuring the said externalities (e.g. carbon footprint, etc.).

What SFDR does NOT do

  • Provide detailed minimum requirements
  • Have any intention to disqualify products

Taxonomy: sorting the language of sustainable finance

The process of charting a path to sustainable economic activity is undeniably tricky. It is complicated by differing opinions, speculation, vested interests, cultural and political diversity as well as many innate contradictions.

Regulators realised early on that the road to sustainable economic growth would need a dictionary as well as a map. It is not hard to see why: novelty is puzzling even at the best of times, and jargon is rife at the confluence of finance and law, wherein the sustainability agenda lies.

Clear guidance on what terms mean and where they are best used is a prerequisite for making progress.

Thus, in March 2018, the EU committed itself to the gradual development of an EU taxonomy to identify environmentally sustainable economic activities. The aim is to bring a common analytical framework to European companies – covered today by the Non-Financial Reporting Directive (NFRD) and then by the Corporate Sustainability Reporting Directive (CSRD) – allowing them to precisely measure the percentage of their revenues that are generated from economic activities compliant with all the criteria listed in the Taxonomy regulation.

That, in turn, will allow investors to have a common perspective on the extent to which companies are environmentally sustainable under the regime of the Taxonomy regulation. To complete the picture, the European Commission also might announce a social Taxonomy.

BNP Paribas Asset Management’s approach to SFDR

We choose to invest responsibly to help shape a better world while generating potential positive financial outcomes for our investors.

More than 80 percent of assets in our open-ended funds are classified as either promoting ESG characteristics (Article 8) or having a sustainable investment objective (Article 9), the highest level you can achieve under the new regulation.

Sandro Pierri, CEO of BNP Paribas Asset Management, says: “We maintain an unwavering focus on achieving long-term sustainable returns for our clients. This single-minded philosophy has shaped our firm and directs all we do.”

  • We know we are the sum of our people
  • We appreciate contrarian, innovative and independent thinkers
  • We value trust, integrity and hard work
  • Expectations are high
  • Success is fairly rewarded and aligned with clients’ objectives
  • Everyone in our company is held accountable

Everyone at BNP Paribas Asset Management understands their duty to make a positive difference in the lives of the thousands of people who rely on our investment decisions. As Sandro says: “Investing means the world to us.”

SFDR disclosure statement

Sustainable finance regulations

Climate change commitments