Sustainable Finance Disclosure Regulation (SFDR)

In response to the 2015 Paris Agreement on climate change, the European Union (EU) made clear commitments to transition to a low carbon sustainable economy. In support of this ambition, the European Commission (EC) has put together a Sustainable Action Plan consisting of several regulations targeting ESG goals. EU Regulation 2019/2088 on sustainability-related disclosures in the financial services sector, referred to as the ‘Sustainable Financial Disclosure Regulation’ or ‘SFDR’ is one of these regulations.

The SFDR enforces new transparency and disclosure obligations (with a phased implementation which began on 10 March 2021) on EU firms, as well as products sold in the EU. The disclosures include information on whether an entity, as well as its products, considers sustainability risks, and if they do, how the entities and products incorporate these risks in their investment processes. Periodic reporting requirements will be enforced with a later deadline.

The SFDR aims to increase the transparency with which affected financial market participants and financial advisers integrate sustainability risks in their investment decisions and investment or insurance advice and products.

1. It will aim to introduce a common way for asset managers to inform investors about ESG related risks.
2. It will aim to help prevent ‘greenwashing’ – that is marketing products as having an ESG component/components when in fact ESG considerations are not substantively taken into account in the investment process.
3. It will aim to increase comparability between sustainable financial products and investment processes across the financial markets.

The SFDR will require certain firms, including private banks, wealth managers, asset managers and advisers, to comply with new rules on disclosure regarding sustainable investments and sustainability risks.

The SFDR applies to all EU FMPs, requiring investment products marketed to the EU to be categorised as one of the following:

Article 9 Products

Products that have sustainable investment as their objective

Article 8 Products

Products that promote environmental or social characteristics

Article 6 Products

Products that do not purport to promote any kind of ESG objective

These categories are decided based on the extent to which ESG or sustainability characteristics are integrated. Disclosure requirements will apply across all categories of products; however, the level and type of disclosure required will depend on the classification of the product. All disclosures to an extent will need to detail how risks are incorporated into the investment management process, as well as the likely impact on returns.

At Royal London Asset Management, we think that environmental, social and governance (ESG) issues are increasingly affecting asset prices. We believe that it is in the best interest of our clients for us, where appropriate, to integrate these issues in our investment process with the aim of improving standards, reducing risk and enhancing returns.

However, many of our funds do not have explicit sustainable or ESG targets or objectives and therefore are categorised as ‘Article 6’ under the SDFR.

Royal London Asset Management has a long-standing ‘Sustainable Investment’ range of funds dating back to 1990. These funds look to invest in companies that provide a net benefit to society and that we believe have strong environmental, social and governance credentials. This investment process takes our own assessment of a company’s suitability for inclusion and ratifies this using an External Advisory Committee.

The SFDR does not directly apply in the UK. It does not apply to UK advisers (so long as those advisers are solely giving advice in the UK) and does not apply to UK domiciled funds (so long as those UK domiciled funds are not marketed in the EU).

The SFDR does however apply to our (Irish domiciled) funds. The funds affected by the SFDR are outlined above.

The SFDR became effective from 10 March 2021.

Though the SFDR does not directly apply in the UK-domiciled products, the FCA is introducing Sustainability Disclosure Requirements (SDR) and investment labels regime on UK entities from 31 May 2024.

In line with the SFDR, we now disclose whether we consider Principal adverse impacts (PAIs) within our investment decision making process (these are impacts of investment decisions that result in negative effects on sustainability factors).

Specifically, we provide the following information on our approach to integrating PAI’s:

• Information on how we identify and prioritise PAI’s
• Description of these impacts and actions taken to mitigate the impacts
• A summary of the firm’s engagement policies
• A reference to responsible business conduct codes and internally recognised standards for due diligence
• We publish on our website information about our policies on the integration of sustainability risks in our investment decision making process.
• In our remuneration policy, we include information on how the policies are consistent with the integration of risk management (which includes sustainability risks).