On April 23, 2020, the European Supervisory Authorities (ESAs) released a joint consultation paper on ESG disclosures in accordance with the Sustainable Finance Disclosure Regulation (SFDR). Within, it discusses the content of disclosure, methodology that needs to be incorporated for reporting and the presentation of the disclosure.
The ESAs had published a regulatory directive on sustainability‐related disclosures in the financial services sector in November 2019, which within states that the Regulatory Technical Standards (RTS) of six items would be released by December 31, 2020, followed by the adverse impact RTS of one item by December 31, 2021. Market participants will begin reporting from January 2022 onwards, with back reporting that may go up to March 10, 2020. Hence, for all practical purposes, financial market participants will have to be ready with mandates by March 10, 2020.
Scope of the Regulation
Two sets of entities are impacted under the scope of the regulation: financial market participants (product manufacturers, portfolio managers, AIFMs, UCITS) and financial advisers (both investment and insurance). Hence, all of IVP’s asset management clients, operating either as advisers or participants under the EU, will need to reexamine their obligations as they will be impacted.
Content of the Regulation
- Pre-contractual disclosures must be completed by both asset management firms and product manufacturers.
- Policies must be reframed and published on each website, detailing how they will integrate financial due diligence with sustainability due diligence when launching a product or providing financial advice.
- ESG parameters must be disclosed in a quantitative manner (as specifically released by this report).
ESG Parameters in the Regulation
The disclosure itself encompasses eight parameters as well as 32 sub-parameters that are mandatory for market participants to report and at least one of the optional parameters must be reported for both the Climate and Social category.
Next Steps for Asset Managers
Firms need to be cognizant of the two aspects of reporting, qualitative and quantitative, that must be done as part of SFDR. Qualitative reporting includes pre-contractual disclosures, policies of investment advice and the interweaving of sustainability factors into financial due diligence. Quantitative reporting includes looking at the data warehouse and finding gaps within the datasets that need to be used for quantitative disclosures. Once the gaps have been identified, the next step is zeroing in on a platform that can automate the generation of the report on an ad hoc basis and also on an annual basis, as mandated by the ESAs.
Given these nuances, IVP Raptor is under development for SFDR and will be live once the RTS is formalized to help managers identify gaps between their present datasets and the ESG datasets required per the new mandate. In an effort to further assist, white glove Managed Services for SFDR will also be available for clients to ease the burden associated with data sourcing, error/gap mitigation, form creation, value approval and final submission.