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Challenges in meeting SFDR Level 2

With regulations globally changing at a fast pace, how have your organisation kept pace and what solutions are there to help? We look at the challenges in meeting SFDR Level 2 regulatory requirements and some solutions to support their implementation.

SFDR: where are we now?

A quarter has now passed since the 1 January 2023 effective date of SFDR Level 2 and fund managers are taking stock. Level 2 required further disclosures in Fund Prospectus and on websites, and the production of new periodic reporting at both fund and entity level. Given pre-contractual documents provide an overview of the more qualitative measures of a product’s ‘sustainability characteristics’, focus has moved to the more quantitative periodic reporting and communication of those metrics. Implementation has not been without its challenges.

So, what are the 3 key SFDR challenges that Devlin Mambo is seeing in the market?

1. The move from qualitative to quantitative:

Anything qualitative in the pre-contractual document requires quantitative disclosure in the periodic reporting. A high degree of oversight is required to ensure consistency, but to ensure that the numbers provided are appropriate and may not cause harm in the future relating to any potential for greenwashing, effective governance and consistency are key.

2. Confidence in the numbers:

A clear process and methodology is required to instil confidence in the quantitative periodic disclosures of Principle Adverse Indicator (PAI) metrics, and this is also necessary for governance sign-off. Challenges remain with ESG data coverage and comparability, so it is imperative that the data gathering and calculation methodology is clear, well governed and available for clients to review. Importantly, investment managers' due diligence on data providers should sufficiently demonstrate why the data providers used continue to enhance the managers’ product integrity.

3. Regulation v industry expectations:

An element of SFDR that is less publicised relates to the ongoing balance between regulatory requirements and industry expectation. A prime example of this is the European ESG Template (EET). The EET facilitates communication of portfolio ESG characteristics between product manufacturer and distributor in a consistent format, and it has more than 600 data fields. The production of EET, while not a regulatory requirement, is a market expectation and there is a substantial effort required to interpret and populate the significant number of data points. All information should align to SFDR requirements, in addition to firm-wide approaches to stewardship and ESG-related initiatives. Close attention should be given to the interpretation and ongoing assurance of the data contained within the EET.

For further information about how Devlin Mambo can help you ensure your products remain compliant in relation to ESG, please reach out to a member of the team.

About the author

Simba Mamboininga

Managing Partner

Delivering a 360° service to the asset management industry

Devlin Mambo

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