SFDR vs. CFA Institute ESG Disclosure Standards for Investment Products

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© Juliana Amorim

A brief comparison of the CFA Institute ESG Disclosure Standards for Investment Products (“the Standards”) and SFDR

The most obvious difference between the Standards and SFDR is that SFDR is mandatory law/regulation in the EU and the Standards are global and voluntary.

Two benefits of national/regional regulation are that it compels action and that it can be tailored to the specific needs of a country or region. However, that power is limited in its reach.

Voluntary standards cannot compel action, but with broad input from markets around the world, they have the power to facilitate cross-border offerings and enhance market efficiency. The process to develop the Standards has included volunteers from twelve countries and comment letters from thirty countries.


Global standards cannot address
all national/regional nuances but
in exchange they offer broad utility
to a large audience.

 

The Purposes Compared

The purposes of the Standards and SFDR are similar in some ways and different in others. They are similar in their goal to foster transparency in investment product disclosures.

However, because SFDR is part of the EU’s action plan for financing sustainable growth, it also has the goals of reorienting capital flows towards sustainable investment, mainstreaming sustainability into risk management, and fostering long-termism in financial and economic activity, whereas the Standards do not have these additional goals.

The only goal of the Standards is to provide greater transparency and comparability for investors by enabling asset managers to clearly communicate the ESG-related features of their investment products. They do not seek to reorient capital flows or to influence investors to allocate capital differently than they already do.

Disclosure Requirements Compared

Because SFDR is focused on sustainability, it goes further than the Standards in requiring disclosure of sustainability-related information.

Because the Standards aim to address all investment products that have features related to ESG issues, they go further than SFDR in requiring disclosures for investment products that are not necessarily promoted as “sustainable” – namely, faith-based investment products and certain impact investment products.

SFDR has requirements for the disclosure of information at the entity-level as well as the product-level and specifies the different sets of information that must be contained in pre-contractual disclosures (i.e., legal documents), website disclosures, and periodic reporting.

The Standards contain only product-level disclosure requirements. Firm-level disclosures are important, but the Standards do not address this area of disclosure because it is already addressed by other voluntary, global standards – primarily the PRI Reporting Framework.

The disclosure requirements in the Standards cover investment product design/strategy which can further be broken down into objectives, constraints, policies, and methods.

The Standards do not address disclosure of holdings, nor do they contain requirements for periodic reporting. These important areas may be addressed in subsequent versions of the Standards.

See also: Interview with Gary Baker, Managing Director for EMEA, CFA Institute (9 September, 2020).

| This article was prepared based on material provided by CFA Institute for information purposes only and does not represent legal or financial advice. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.