Ocorian: Asset managers should prepare for changes to the SFDR
Ocorian is predicting changes to the Sustainable Finance Disclosure Regulation (SFDR), having analysed clues from the formal review of the regulation carried out by the European Commission in late 2023.
The EU Commission is expected to announce amendments later this year, but Ocorian is urging alternative asset managers to stay prepared and is highlighting what they can do to be one step ahead of more stringent ESG reporting which will likely take effect in 2025.
The five key changes anticipated by Ocorian in the next SFDR update:
- Stronger disclosure requirements: The update is expected to require more granular information on sustainability factors considered in investment decisions, portfolio characteristics related to sustainability objectives, and the impact of investments.
- Taxonomy alignment: The EU Taxonomy for sustainable activities is expected to play a more prominent role in SFDR classification. Products labelled 'Article 8' (promoting environmental or social characteristics) or 'Article 9' (sustainable investment objective) will likely need to demonstrate a stronger alignment with the taxonomy.
- Sustainability risks: The concept of 'sustainability risks' is likely to receive more focus. Disclosures might need to elaborate on how these risks are integrated into investment processes and risk management frameworks.
- Principle Adverse Sustainability Impacts: More emphasis might be placed on disclosures regarding Principle Adverse Sustainability Impacts (how investments negatively affect environmental or social goals). Reporting on engagement activities with companies on these issues could also be required.
- Product labelling: The existing SFDR labels (Article 8 and 9) might be revised or supplemented with new categories to offer more clarity and comparability between different products. EU and UK regulators are consulting with each other, so it’s likely they will try to harmonise an approach to labelling across both regions, to help address the challenges faced by retail investors when trying to understand a financial product’s focus on sustainability.
