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SFDR: The top 5 actions to take in 2024

28 Dec 2023

By Lyons O’Keeffe, ESG Director, and Sarmad Naim, Principal Consultant

Environmental, social, and governance (ESG) considerations have been top of mind for fund and asset managers in Europe for several years, and 2024 will be no exception. In September, the European Commission initiated a targeted and public consultation to elicit feedback on SFDR ahead of upcoming regulatory changes. This consultation period concluded on 15 December.

In anticipation of upcoming changes to SFDR regulation, we recommend these top five actions to fund managers looking to keep their portfolios and processes compliant moving into 2024.

If you missed our piece on lessons learned from the first SFDR reporting cycle, click here to read it.

1. Future-proof your SFDR compliance

Preparing for regulatory changes before they’ve been announced is a tricky balancing act, rife with unknowns. The only certainty is change, meaning that the riskiest course of action is to proceed into the year ahead assuming you’ve ticked all the boxes and are in compliance with all current and future SFDR requirements.

Instead, anticipate change, allocate time for monitoring any variations and ensure that your processes are flexible enough to adapt, so you remain compliant. Minimum compliance in a shifting environment may carry risk, so buffer your SFDR-related actions by going above and beyond the current regulatory requirements wherever possible. While we don’t know what the updated requirements will be, it is widely expected that upcoming regulation will clarify vague or confusing language, becoming stricter and more prescribed.

By way of example, the broad Article 8 category is a likely candidate for better defined and possibly stricter requirements. Under SFDR, an Article 8 fund promotes ‘some’ ESG characteristics—a vague standard that has long been a focal point for change. Take stock of Article 8 funds and consider if there are any assets that actively harm overall sustainability objectives, as this is a requirement that may well come into being under SFDR based on the direction taken recently by the UK’s Sustainability Disclosure Requirements (SDR).

2. Conduct internal consistency checks

Has your sustainable mission during 2023 been consistent and aligned with pre-contractual statements and information memoranda? How well did you perform compared to your documented objectives, and what (if anything) should change going into 2024? If your outcomes or actions were inconsistent, seek advice from an expert or conduct a peer review.

3. Review for market alignment

Alongside internal consistency, checking for alignment with broader market behaviour is important. Assess how well your actions resonated with market trends and adjust your future-looking strategies accordingly. Feasibility studies and third-party consistency checks can be instrumental in this process by providing a benchmark for alignment and revealing potential areas for improvement. With a moving regulatory backdrop, if one is an outlier, it is helpful to be aware of that and be confident around the rationale.

4. Streamline data gathering

After the year ends on 31 December, fund and asset managers will have six months to compile and produce 2023 SFDR reporting. This is likely to include key performance indicators such as carbon emissions from portfolio companies.

Digital tools can help streamline this process, increasing visibility into progress and improving the ease of data gathering. Novata, a leading technology platform (and IQ-EQ partner) that specialises in ESG data collection, reports 85% report submission rates due to actively assisting portfolio companies in the process of information gathering and answering any queries they may have.

However you collect your data, it’s essential to maximise the fulfilment rates and ultimately be able to explain and justify any data gaps or discrepancies ahead of regulatory and investor scrutiny.

5. Audit and review your internal ESG processes

Conduct a “wellness check” of your policies and procedures and most importantly their implementation. The audit should verify that your processes effectively support your stated objectives and reflect your commitments. And prove that they’re being implemented. Documentation, such as reports, email communication and meeting minutes, is vital in demonstrating there is a ‘system’ that is being complied with.

Wherever you are in your SFDR reporting journey, IQ-EQ can help. Get in touch with our expert team to learn how.

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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