The Sustainable Finance Disclosure Regulations (SFDR) were the focus of an Impact Summit Europe 2023 educational workshop moderated by Phenix Capital Group Carol Tarr, with experts delving into the intricacies of the new framework. The panelists included Johan Vanderlugt from Kempen van Lanschot and Fransje Puts from MN.
This session covered the following topics:
How to define sustainable investments? And how to set up a framework accordingly?
How to approach the cut-off of the ‘Do Not Significantly Harm” test?
How to use SFDR disclosures in practical investment decisions?
During the SFDR workshop, Johan stressed the importance of understanding the needs of different audiences, saying that "you have to be sure that you cater to different needs, different shades of sustainability that there are out there."
Johan emphasized the significance of sustainable investment, saying that "if you only have article 8 without sustainable investment, you're not going to make the cut." Fransje also mentioned that they only manage article 8 in-house, but did not classify any of their products as article 9.
Johan addressed the question of "8 plus" funds, an unofficial category and a contentious subject, which are funds invested in sustainable investments beyond those required by Article 8 of the SFDR regulations. These funds are invested in sustainable investments that go beyond the minimum requirements set by Article 8, which is focused on promoting environmental and social characteristics. Johan emphasized that simply meeting the requirements of Article 8 is not enough to create a truly sustainable investment fund.
Fransje discussed the challenges of obtaining data on the Principle Adverse Impact (PAI) indicators, particularly for social impacts targeting fund managers. She expressed hope that SFDR would help to bring more data to light, particularly in the illiquid markets.
The workshop also discussed the concept of Do No Significant Harm (DNSH), with Carol asking when does harm become significant. Johan responded by saying that the investment community has been working with this concept for many years, citing the OECD guidelines and the U.N Global compact principles. He emphasized that companies or assets that violate these principles to a certain degree are causing harm and that's not the kind of investment clients want to be exposed to.
The panelists also discussed the challenges of creating benchmarks for social indicators, with Fransje stating that she is "not a really big fan of set-up benchmarks because you should align your own ambitions in your products." Johan added that the real opportunity is to see greater harmonization in investment objectives, stating that "when we say that our investment fund has a social investment objective, what kind of objective do we refer to? How do we map it? What do we invest in? What don't we invest in?"
As for SFDR itself, the panelists discussed its purpose and how it should be used. Fransje expressed concern that SFDR had become a labeling system, saying that "a lot of asset managers are now using it as a marketing tool." Johan, however, emphasized the opportunity to get disclosure right, stating that "it's an opportunity to raise the bar for the industry to set best practice standards and to make sure that we all strive to those standards."
Overall, the panelists emphasized the need for more clarity and harmonization in SFDR, particularly in terms of investment objectives and the data required for reporting. They also stressed the need to focus on the real-world impact of investments and not just compliance with regulations. As Johan put it, "to really tackle the real-world problems, you cannot solely embrace benchmarks."
During the Q&A session, a question was asked about registering funds as article 9 or sticking to article 8. Fransje responded, saying that they had only classified their products as article 8. Johan added that they had two article 9 funds, the global impact pool and the SEG Farmland fund, which are invested in hardcore impact investments that are trying to create solutions for environmental and social issues.
Another question was raised regarding the French Financial Markets Authority (Autorité des Marchés Financiers, AMF) sending a strong message on excluding some sectors de facto from every article 9 and whether the panelists had any views on this. Johan responded by saying that it was a great development of the AMF to be raising its voice here and that it goes to the very core of the matter of whether we should distinguish between taxonomy-aligned and non-taxonomy-transitioning sustainable investments.
The panelists agreed that SFDR needs more clarity and harmonization, particularly in terms of investment objectives and the data required for reporting. They also stressed the need to focus on the real-world impact of investments and not just compliance with regulations.
Watch the full session here on YouTube.