The aim of the SFDR regulations is to provide more transparency on sustainability within the financial markets in a standardised way, thus preventing greenwashing and ensuring comparability.
Promoting sustainability within the financial world
In 2018, the European Commission published the EU Sustainable Finance Action Plan aimed at promoting sustainability within the financial world. These regulations are also called ESG regulations because the respective rules are based on Environmental, Social and Governance (ESG) criteria.
What is SFDR?
The SFDR is the frontrunner of the set of regulations resulted from the European Action Plan for Financing Sustainable Growth. The aim is to provide more transparency on sustainability within the financial markets in a standardised way, thus preventing greenwashing and ensuring comparability. SFDR regulation introduces various disclosure-related requirements for financial institutions at entity, service and product level. This new disclosure obligations will be applicable as of March 10th 2021.
What is the scope of SFDR?
The SFDR mainly applies to financial institutions (banks, insurers, insurance intermediaries, asset managers and investment firms) operating within the EU. The requirements applies to financial products such as:
Discretionary portfolio management by credit institutions or investment firms
Alternative investment funds (AIFs) and UCITs (investment funds)
Insurance-based investment products (IBIPs)
Pension products, Workplace pensions products regulated under the IORP directive and PEPP
What are the disclosure obligations?
As a result of the SFDR, financial institutions must make certain (ESG-related) sustainability information public at an entity and product level. This information must be provided on the website and in the pre-contractual phase and in addition, in a later phase, periodic information will be provided via reporting. These information obligations apply to all financial market parties, regardless of whether they are specifically concerned with sustainability or not.
Disclosure obligations at entity level
At the entity level, multiple disclosures are required in the investment process and when providing investment advice
Disclosure is required on whether sustainability risks are included
Disclosure on whether or not any negative sustainability effects are taken into consideration (Principle Adverse Impact - PAI)
In addition, the organization’ remuneration policy must include how that policy is consistent with the integration of sustainability risks. Sustainability is a key component of ING Group’s strategy. As a financial institution, ING Group plays a role by financing change, sharing knowledge and using its influence. ING Group not only manages its own direct and indirect impact, ING Group also helps its clients address the risks and opportunities that environmental challenges create. The remuneration policy of ING Belgium adheres to these principles and does not encourage excessive risk taking with respect to sustainability risks and is linked to risk‐adjusted performance.
ING's policies:
Disclosure obligations at product level
Transparency requirements with regards to sustainability also apply at a product level. The pre-contractual information must indicate how sustainability risks are taken into account in investment decisions and within advice, how this affects the expected return or why they are not relevant. If a sustainable product is offered, additional information requirements apply. Additional information about the sustainability of the investments must then be provided to prevent all kinds of investments from being incorrectly advertised as "green" or "sustainable" ("greenwashing").
Under the SFDR regulation there are different product categories:
Financial products having sustainable objectives (article 9)
Financial products promoting environmental or social characteristics as part of the broad investment strategy (article 8)
Financial products that either consider ESG risks as part of the investment process or are explicitly declared as non-sustainable (article 6). There is a difference between products taken sustainability risk into account and those who do not.
Would you like to know more?
Visit our website on sustainable investments