If your company has been woking on creating the mandatory SFDR templates, you have probably read the AFM’s research report “Clear templates needed for sustainable investing“!
Haven’t gotten around to it yet? Here you can quickly catch up on what the AFM’s findings were.
The AFM expects companies that do not currently comply with the basic requirements (level 1) of the SFDR to take immediate action to comply in the short term. Companies that make insufficient efforts to comply will be addressed. In addition, the AFM attaches great value to the information provided with the standardized templates and expects all companies in scope to use them. This is because the quality and reliability of the sustainability information is essential for investors to select the right financial products.
The results of the self-assessment are based on self-reporting by companies. This means that the AFM did not conduct an independent investigation into the accuracy of the answers given. The focus of the survey was on the presence of mandatory sections, layout and understandability of information. Furthermore, the self-assessment mainly asked whether certain information is present and whether certain process steps have been carried out. The report provides no insight into the quality of information or execution. The screening of the templates focuses only on how they are completed. Whether the information provided therein, such as for example the investment strategy followed, corresponds to what the company carries out in practice, was not part of this investigation.
In this article, we build on the AFM’s key findings regarding the SFDR pre-contractual templates and provide concrete guidance on how to complete them. We also discuss the AFM guidance for completing a pre-contract template. Finally, we update you on the latest developments surrounding the SFDR templates.
According to the AFM, the use of the template for pre-contractual information is generally going well. However, the information presented in the template does not always meet the set conditions. The AFM report reveals that the information provided is often still difficult to understand. This is partly due to the use of language that is too vague and/or general. Also, the presentation of this information sometimes does not meet the set requirements, or the template cannot be found on the company’s website.
The results of the self-assessment show that a significant portion of companies do not commit to making sustainable investments within their products with sustainable characteristics (Article 8). They often report a minimum percentage of 0% or indicate that they do not have the data to determine this. However, the lack of data should not result in companies failing to specify a minimum percentage of sustainable investments in the pre-contractual information. The AFM encourages companies to continuously collect and evaluate data to determine and monitor the proportion of sustainable investments. This is an important factor for investors interested in the financial product.
In this video (in Dutch), we explain how the template for pre-contractual product information Level II SFDR needs to be completed.
The AFM expects companies to ensure that pre-contractual information in the templates is accurate, clear, non-misleading and balanced. The AFM Guidance on Sustainability Claims provides guidance to ensure that sustainability-related information meets these standards.
To help companies, the AFM has included guidelines and examples in the research report. Although these guidelines may seem straightforward, we often see them incorrectly applied in practice. It is therefore good to consider these guidelines. Below we highlight some key points.
Update regularly to remain compliant with new and changing regulations and market conditions. Establish a process to ensure periodic review of sustainability information. This can also ensure that marketing communications are aligned with sustainability information.
On Dec. 4, the ESAs published a report recommending adjustments to the current Level 2 requirements, including the introduction of a new “dashboard” with a simple summary of key information. This report is currently awaiting approval by the European Commission. You can read an overview of the proposed changes in this article. In this article, we restrict our discussion to the proposed ‘simplified’ SFDR product templates.
The templates will be simplified by rearranging the information and removing the green color from all input fields except taxonomy charts. A special dashboard is introduced to make disclosure more understandable and less complex, with key information on the first page and detailed information on subsequent pages. The dashboard indicates whether a financial product has a sustainable investment objective or promotes environmental and/or social characteristics and includes four key elements: (i) sustainable investments, (ii) taxonomy-aligned investments, (iii) consideration of principal adverse impacts (PAIs), and (iv) greenhouse gas emission reduction targets. Furthermore, icons indicate whether the financial product contains any of these elements. Additionally, most questions have been rewritten or otherwise improved for clarity.
Due to this restructuring and the addition of the dashboard, existing texts must be modified in certain places. The ESAs also propose revising the templates regarding language, layout and structure to enhance comprehensibility. The information must be available in inline XBRL-format so that it is machine-readable, and there will be a new requirement for companies engaging in sustainable investments to describe thresholds and criteria that determine that these investments do not significantly harm other environmental or social objectives.
The AFM expects companies to pay ongoing attention to the quality of the sustainability information provided in the product templates. In its future supervision, the AFM will place even more emphasis on the quality and reliability of the sustainability information provided. So, make sure that the information presented is of such quality that it is transparent and unambiguous for the target group of the financial product!
The ESG experts at Projective Group have been supporting companies in drafting SFDR templates since the SFDR came into effect. So, feel free to contact us without obligation to see what we can do for you!