Preparing for sustainability disclosures
Are you ready to comply with the upcoming reporting obligations?
The SFDR requirements applicable from March 2021 were the first of a series of actionable reporting obligations.
Florence Buron - Director - Financial Industry Solutions - Deloitte
Elodie Vandewoestyne - Manager - Consulting IM & PERE, Sustainability team - Deloitte
Katharina Lamparski - Analyst - Consulting IM & PERE, Sustainability team - Deloitte
Published on 13 May 2021
For the financial industry, the years 2021 through to 2023 will be marked by the progressive enforcement of EU Regulations 2019/2088—aka the Sustainable Finance Disclosure Regulation (SFDR)—and 2020/852 regarding taxonomy. Both regulations aim to increase the transparency of non-financial information disclosed by financial market participants (FMPs) and financial advisers (FAs) in order to counter greenwashing practices and make it easier for investors to assess and compare sustainable and responsible investment strategies and products.
At the time of writing this article, the next SFDR and taxonomy milestones are fast approaching. Indeed, as of January 2022, FMPs will have to disclose detailed non-financial information about their funds in pre-contractual documents and periodic reports. This should be performed by filling in a mandatory template that must be added as an annex to prospectuses and periodic reports. In addition, all FMPs will have the choice—and, in case they have over 500 employees, the obligation—to report on the principal adverse impacts of their investments on sustainability factors. Figure 1 provides an overview of the key SFDR and taxonomy landmarks that lie ahead.
THE EMERGENCE OF ESG FACTSHEETS
While regulatory bodies are still agreeing on the SFDR and taxonomy level 2 requirements, a number of FMPs have already proactively started to disclose their funds’ environmental, social, and governance (ESG) performance. Such reporting usually takes the form of an ESG factsheet: a document that resembles the traditional financial factsheet, but adds a dimension around ESG indicators like controversies and non-financial key performance indicators (KPIs).
By reviewing publicly available ESG factsheets, Deloitte observed similarities in the way these documents are articulated and in the data they display. The reports are usually composed of two main parts:
- The first part summarizes fund characteristics in terms of investment strategy, top holdings, fund performance, benchmarks, etc. These data points are commonly available in traditional factsheets;
- The second part is oriented towards ESG KPIs, usually displaying macro KPIs such as scoring of the funds or main sustainability themes, followed by detailed ESG KPIs, benchmarks and information on controversies. Figure 2 summarizes the main ESG KPIs generally displayed on ESG factsheets.
Environmental KPIs Indicators displayed are related to the below eight topics:
● Greenhouse gas emissions ● Biodiversity ● Water ● Waste ● Emissions ● Energy performance ● Water, waste and material emissions ● Green securities
Social KPIs Indicators displayed are related to the below three topics:
● Social and employee matters ● Anti-corruption and anti-bribery ● Human rights
Corporate governance KPIs Indicators displayed are related to:
● Anti-corruption and anti-bribery
● Adverse impact indicators’ categories aligned with the Final Report on draft RTS with regard to the content of disclosures pursuant to Article 2a, 4(6) and (7), Article 8(3), Article 9(5), Article 10(2) and Article 11(4) of Regulation (EU) 2019/2088
● Additional categories of indicators that complement the principal adverse sustainability impacts statement
ESG FACTSHEETS AS A KEY DIFFERENTIATOR
Even if ESG factsheets are not mandatorily required by the sustainability disclosure regulation, issuing them on a voluntary basis provides two key advantages for FMPs:
1. A straightforward and visual marketing tool, ESG factsheets concisely present the fund’s ESG positioning and overall ESG strategy to end investors. This increasingly attracts retail and institutional investors, as they become more and more demanding regarding sustainable and responsible investment and expect to be informed about their investments’ ESG performance.
2. By building ESG factsheets, FMPs can anticipate the SFDR reporting obligations, so as to be prepared for the January 2022 application date. We noted that issuing ESG factsheets effectively pushes FMPs to start reflecting on their existing reporting framework and the necessary adaptation in terms of operations and data sourcing to meet the upcoming regulatory requirements.
WHERE TO START?
While the mandatory SFDR and taxonomy disclosure templates, which FMPs must adopt as of January 2022, provide good guidance regarding the type of non-financial information that must be disclosed for each fund, the core ESG reporting challenge consists in gathering the necessary information.
FMPs can stay one step ahead of competition by preparing ESG factsheets prior to the SFDR’s January 2022 milestone. By the application date, front-runners will have had sufficient time to optimize their ESG reporting processes, gaining experience and overcoming the major ESG reporting hurdles.
Indeed, identifying necessary internal and/or external data sources is key to guarantee consistent and scalable reporting over time. In the specific case of ESG data, the selection of an external data vendor proves to be a challenging exercise in itself: there exists a high number of data vendors on the market (generic data vendors vs. specialized ESG data vendors) and FMPs must consider the variety of offerings, discrepancies in data points, data coverage and quality, as well as ESG scoring
methodologies. Selecting the most appropriate data vendor presupposes the involvement of internal ESG specialists to ensure that the latter can use the data points in their investment screening and selection process and that generated reports correctly reflect the ESG information.
FMPs should note that, under the SFDR, the data collection must be undertaken on a quarterly basis and the report must be annually refreshed. It is therefore key that FMPs keep a golden copy of the reported data in order to ease the maintenance process of such reports.
Finally, we urge FMPs not to underestimate the importance of leveraging firm-internal knowledge and experience about ESG. Financial professionals are used to managing financial data but when it comes to ESG specific data, we usually observe a lack of knowledge throughout the entire value chain. Therefore, embedding the ESG philosophy in products and investment processes requires adequate staff trainings.
SFDR and taxonomy level 2 impose regulatory reporting obligations that are more challenging to implement than those for March 2021. This is partly because FMPs will be required to disclose on the ESG performance of their funds, urging them to establish an adequate reporting framework, which includes the identification and collection of the relevant ESG data.
Preparing for the above will also require FMPs to define roles and responsibilities on this new ESG framework and put in place adequate training for the staff involved in the generation of these new reports.
By disclosing ESG factsheets as an initial, key step in a player’s sustainability journey, FMPs can increase their exposure towards end-investors. The issuance of such voluntary and non-regulatory ESG reports also enables FMPs to streamline and smoothen the SFDR implementation effort throughout the year and be ready for the January 2022 milestone.
Deloitte’s Responsible Investment Reporting Services
Are you facing increased demands from retail and institutional investors regarding sustainable and responsible investments, as well as regulatory pressure from the European Commission to report on environmental, social and corporate governance (ESG) criteria (for example, the SFDR deadline in March 2021)?