Use Case
Wed, 03 Apr 2024
Navigating the Transition: Meeting SFDR Requirements for Article 8 & 9 Funds

Meeting SFDR Requirements while aligning ESG with your investment criteria

Following the evolution in the disclosure criteria for European funds under the Sustainable Finance Disclosure Regulation (SFDR) framework, over 56% of European Investors were identified to have rejected a continuation of their fund commitments, due to poor Environmental, Social and Governance (ESG) integration and disclosure practices of the fund. Therefore, with the growing regulatory and investor pressure  and the fast approaching reporting deadlines, the needs of funds for ESG solutions that bring both clarity around SFDR disclosure and the insights necessary to use ESG in designing strategies that make financial sense, are exactly what the ConsciESG platform is built to address. 

Here is a breakdown of how the ConsciESG platform can help funds integrate ESG in ways that it can help them create value, while facilitating their Article 8 or 9 compliance: 

Integration of ESG Factors at product level: A crucial part of both Article 8 (light green) and Article 9 (dark green) disclosure requirements is their ability to substantiate their sustainability claims. This necessitates designing a clear strategy on how to integrate ESG factors into investment decisions and as we see SFDR evolving, the ability to follow through with the disclosed strategy over time, in order to avoid any greenwashing future fines. Using the ConsciESG software not only as an assessment tool, but for its portfolio-level insights around the financial implications of ESG actions, can help the fund determine the most economically viable transition path that also ensures its desired SFDR status. 

Data Collection and Management: Under SFDR, funds must navigate the challenge of sourcing reliable data to support their sustainability claims, often requiring extensive due diligence on potential investments. ConsciESG tools can be used to fulfill the EU criteria for third-party verification. 

Regulatory Compliance: SFDR imposes rigorous disclosure requirements, demanding transparency in how funds integrate sustainability risks and their impact on investment decisions. For Article 8 and 9 funds, this means detailed reporting on their investment strategies, the sustainability indicators they monitor, and their adherence to the "do no significant harm" principle. The portfolio data collection and analytics reports, can help funds to transparently prove the claims they make on their website or in their compliance reports. 

Through the case study below, we break down how the ConsciESG platform has helped a European fund to meet Article 8 compliance criteria. 

Client Request: Facing pressure from their own investors, a medium-sized EU-based private equity fund, previously classified as SFDR Article 6, sought to transition its portfolio to meet Article 8 criteria. The fund had no clear ESG integration strategy, no previous fund-level ESG data to design a viable strategy and wanted to do a thorough evaluation of its portfolio before filing its next SFDR report. 

Implementation Process: The fund integrated ConsciESG’s platform to assess its investments’ impact on all the Principle Adverse Impacts as determined by the SFDR. Based on the result, it estimated its readiness to transition to Article 8 and determined a clear strategy on the fund’s ESG objectives that would be followed and promoted. 

Outcome: The fund established a transparent, data-driven approach to ESG integration, achieved clarity in setting a viable transition plan and was ready to disclose its ESG commitments on the website, together with filing a PAI report the same year. The fund made no commitments to sustainable investments, but was confident in achieving its stated ESG targets. 

In lack of clear thresholds, SFDR compliance leaves room for error and interpretation when not handled accurately. ConsciESG helps funds to follow a methodical, data-driven and transparent approach to ESG integration, to ensure not only short term compliance confidence, but long term impact and financial success. 

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