Since the beginning of 2023, the SFDR applies to asset and fund managers. Throughout the year, the EU Taxonomy will start showing its initial effects, and an EET (European ESG Template) will have to be created since December 2022 – or even earlier. But what does all of this mean, why does it exist, and how can asset managers or AIFMs (Alternative Investment Fund Managers) comply with the new regulatory requirements? To efficiently clarify these matters, Marie Niemczyk, Head of the ESG Client Portfolio Management Team at Candriam and Moritz Weigand, Sales Manager at Anevis Solutions, have teamed up for this guest post for

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Breaking down the terminology systematically, the interaction is quickly explained: The EU Taxonomy Regulation defines which activities of companies can be considered environmentally sustainable. It also sets clear and quantifiable thresholds. For example, it specifies how much fine particulate matter is allowed to be generated per megawatt-hour produced without categorizing an energy producer as no longer sustainable. The SFDR (Sustainable Finance Disclosure Regulation), on the other hand, requires financial market participants to disclose the extent to which their own investment objectives align with the EU Taxonomy Regulation and whether they are consequently sustainable or not.

The EET (European ESG Template) is nothing more than a standard format commonly used in the financial industry to efficiently transmit the sustainability data of financial products in detail.

In summary, this means that companies report on their activities, which are then categorized into specific sustainability categories based on the EU Taxonomy Regulation and communicated to their investors. Investors disclose the extent to which their investment products meet sustainability criteria and transmit any changes via the EET to relevant market data providers.

So, what’s the challenge for AIFMs and asset managers? 

AIFMs need to collect the relevant sustainability data from the companies in which they hold shares. Since there is no uniform standard for this data transmission, this work can be extremely laborious. At the same time, AIFMs also need to report on their own activities and how sustainable they are.

For asset managers, it always depends on the individual case: If an asset manager only distributes or manages funds administered by an AIFM, it’s easier: All mandatory documents are received from the AIFM, and they essentially don’t have to worry about it. However, if they also offer individual asset management, things become more complicated. They need to be accountable to their clients regarding the sustainability of the investments made. This is usually feasible for publicly traded securities, although it might be time-consuming. The challenge increases when private equity and private debt investments are involved, for which accessible public market data isn’t readily available. In such cases, the asset manager will likely have to approach all parties involved to gather the necessary data. The parties involved will depend on the company, industry, and exposure.

What does an SFDR reporting entail? 

In addition to the final categorization of a financial product into one of the following sustainability categories, it includes PAI (Principal Adverse Impact) statements.

  • Article 6: The product does not pursue a sustainability objective and does not consider any ESG characteristics. 
  • Article 8: The product considers ESG characteristics. 
  • Article 9: The product has a sustainable objective (referred to as Impact Orientation). 

As a rule of thumb, the higher the article number, the more sustainable the product. The PAI statements (Principal Adverse Impact) indicate to what extent potential adverse effects within a strategy are considered.

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