The Sustainable Finance Disclosure Regulation (SFDR) came into force on 10 March 2021. It is the first major milestone in the implementation of the EU’s sustainable finance regulatory framework which will continue to evolve in future years. As further requirements under SFDR are issued, the disclosure documents will be updated in line with these changes.
The regulation applies to all new pension, investment and savings contracts.
It requires financial brokers and product producers to disclose information about how they approach sustainability risks in their advice processes and in their investment decisions respectively.
A sustainability risk means an environmental, social or governance event or condition that, if it occurs, could cause a negative material impact on the value of the investment.
To comply with this regulation, particular information must be provided to the customer prior to the signing of the product contract or application.
What is the likely impact of sustainability risks on the returns of investment products?
Sustainability risk will vary depending on the specific risk and asset class. A sustainability risk may impact a specific investment fund; it may also impact an economic sector or geographical region and so impact underlying investments of the fund.
If a sustainability risk occurs, there may be a sudden negative impact on the value of an investment. In extreme circumstances, the value of the full investment may be lost. Considering sustainability risks in advance, as part of investment decisions helps minimise the risk of this happening.
Investment funds which promote environmental or social characteristics (ESG funds) must be identified. These funds aim to promote environmental and social characteristics and focus more on investment in sustainable companies and those with low carbon aims.
Adelphi Financial Brokers has implemented SFDR in its advice process.