Promoting sustainability within the financial world
In 2018, the European Commission published the EU Sustainable Finance Action Plan aimed at promoting sustainability within the financial world. These regulations are also called ESG regulations because the respective rules are based on Environmental, Social and Governance (ESG) criteria.
The Sustainable Finance Disclosure Regulation (SFDR) is part of the ESG regulation and its aim is to provide more transparency on sustainability within the financial markets in a standardised way, thus harmonising rules, ensuring comparability and preventing greenwashing.
What is SFDR?
The SFDR is the frontrunner of the set of regulations resulted from the European Action Plan for Financing Sustainable Growth. The aim is to provide more transparency on sustainability within the financial markets in a standardised way, thus harmonising rules, ensuring comparability and preventing greenwashing. SFDR regulation introduces various disclosurerelated requirements for financial institutions at entity and product level. These new disclosure obligations are applicable as of March 10th 2021.
What is the scope of SFDR?
The SFDR applies to financial institutions acting as financial market participants (banks and investment firms providing portfolio management, insurers, insurance intermediaries, asset managers, institution for occupational retirement provision (IORP), manufacturer of a pension product, pan‐European personal pension product (PEPP) provider, manager of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013 and manager of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013) operating within the EU. The regulation applies as well to financial institutions acting as financial advisors (banks, investment firms and asset managers providing investment advice, insurers and insurance intermediaries providing insurance advice).
The requirements apply to the following financial products:
- Discretionary portfolio management by credit institutions or investment firms
- Alternative investment funds (AIFs) and UCITs (investment funds)
- Insurance-based investment products (IBIPs)
- Pension products, Pension scheme and Pan-European personal pension product (PEPP).
What are the disclosure obligations?
As a result of the SFDR, financial institutions must make certain (ESG-related) sustainability information public at entity and product level. This information must be provided on the website and in the pre-contractual documentation and in addition, in a later phase, periodic information will be provided via reporting. These information obligations apply to all financial market participants and financial advisers, regardless of whether they are specifically concerned with sustainability or not.
Disclosure obligations at entity level
At ING Luxembourg level, acting as financial market participant and as financial adviser, multiple disclosures are required in relation to the decision making process and when providing investment advice:
1. The disclosure is required on whether sustainability risks are included:
2. The disclosure on whether or not any negative sustainability effects are taken into consideration (Principle Adverse Impact - PAI):
3. Disclosure regarding the organization’s remuneration policy, that must include how the policy is consistent with the integration of sustainability risks:
"Sustainability is a key component of ING Group’s strategy. As a financial institution, ING Luxembourg as part of the ING Group plays a role by financing change, sharing knowledge and using its influence. ING Luxembourg not only manages its own direct and indirect impact, ING Luxembourg also helps its clients address the risks and opportunities that sustainability challenges create. The remuneration policy of ING Luxembourg adheres to these principles and does not encourage excessive risk taking with respect to sustainability risks and is linked to risk‐adjusted performance."
Disclosure obligations at entity level
Transparency requirements with regards to sustainability also apply at a product level. The pre-contractual information must indicate how sustainability risks are taken into account in investment decisions and within advice, how this affects the expected return or why they are not relevant.
If a sustainable product is offered, additional information requirements apply. Additional information about the sustainability of the i product must then be provided to prevent all kinds of investments from being incorrectly advertised as "green" or "sustainable" ("greenwashing").
Under the SFDR regulation there are different product categories:
- Financial products having sustainable objectives (article 9)
- Financial products promoting environmental or social characteristics as part of the broad investment strategy (article 8)
- Financial products that either consider ESG risks as part of the investment process or are explicitly declared as non-sustainable (article 6). There is a difference between products taken sustainability risk into account and those who do not.
For each product, the following information will be disclosed:
- a description of the environmental or social characteristics or the sustainable investment objective;
- the information on the methodologies used to assess, measure and monitor the environmental or social characteristics and the relevant sustainability indicators used to measure the environmental or social characteristics or the overall sustainable impact of the financial product.
The information regarding how sustainability risks are taken into account for each product that falls under the SFDR regulation, can be found in the ING Sustainability Risks Policy.