What is the SFDR?
Under the new SFDR (Sustainable Finance Disclosure Regulation) disclosure requirements, investment funds are under-going a regulatory overhaul designed to combat green washing and offer investors greater transparency.
The SFDR will focus on disclosures for assessing the environmental, social and governance (ESG) outcomes of a firm’s investment process. As its name suggests, much more emphasis will be placed on disclosures which will necessitate the integration of sustainability risks and consideration on principal adverse impacts on sustainability.
The SFDR forms part of the EU’s wider Sustainable Finance Framework which is backed by a broad set of new and enhanced regulations that will apply across the 27-nation bloc. The SFDR goes hand in hand with the Sustainable Finance Action Plan which aims to promote sustainable investment across the EU, and a new EU Taxonomy to create a level playing field across the whole EU.
Osmosis welcomes and supports the move towards greater clarity and fully embraces the new EU fund classification regime.
As of 10th March 2021, all our fund documentation was updated to reflect our article 9 categorisation across our entire suite of long only and alternative investment funds. We are now working towards the more detailed reporting requirements under SFDR for Article 9 firms which will apply from 2022.
The Fund Classifications
The SFDR defines and introduces transparency requirements on financial products’ characteristics such that they can be compared on the basis of their ESG credentials.
Under the new SFDR regulation funds and mandates are classified under three categories, as laid out by Articles 6, 8 and 9 of the regulation.
- Article 6 covers funds that do not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG funds such as tobacco companies or thermal coal producers. While these will be allowed to continue to be sold in the EU, provided they are clearly labelled as non-sustainable, they may face considerable marketing difficulties when matched against more sustainable funds.
- Article 8, (aka Light Green), applies “… where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.”
- Article 9, (aka Dark Green) applies to ‘products targeting sustainable investment’ which covers financial products which have sustainable investment as their objective including climate change mitigation through a measurable reduction in carbon emissions.
For a more detailed analysis of the key characteristics of the Osmosis Investment Strategies as they relate to the SFDR please see the attached report.