As of 10 March 2021, pursuant to the EU Sustainable Finance Disclosure Regulation (SFDR), certain entities and funds that meet the criteria (other than firms with over 500 employees in which case the effective date is 30 June 2021) are subject to mandatory disclosure requirements. The SFDR’s aim is to strengthen existing policies on sustainability risks and to promote consistency of sustainability disclosure.
Is this applicable to me?
It will have to be understood whether the entities and funds (both current, existing and upcoming) fall within the scope of the SFDR obligations – while the SFDR hasn’t been included as part of Brexit transition (the UK will instead be putting forward alternative mandatory climate disclosures), many UK-based PE firms will still be subject to SFDR when marketing funds into the EU or managing EU-based funds.
What needs to be disclosed?
The SFDR’s remit is wide: it covers remuneration and risk policies, investment and internal processes and systems and general product governance. The following, among other things, are required to be disclosed to be in compliance with the SFDR:
- sustainability policies and an assessment of sustainability risks on investment decisions.
- the impacts on sustainability of strategic decisions (and to “comply or explain” why they do not consider such impacts).
- the way in which remuneration policies are consistent with sustainability principles on both a quantitative and qualitative basis.
Notably, as a result of greater investor attention on funds’ ESG credentials and the eventual regulatory disclosure obligations that will be required by all firms in the coming months and years, many firms are making the strategic decision to comply with the SFDR requirements voluntarily.