March 2021 saw Regulation (EU) 2019/2088 of the European Parliament and of the Council of November 27 2019 on disclosure of information related to environmental, social, and governance (ESG) criteria in the financial sector (SFDR) finally becoming applicable.

This regulation, issued in the context of the EU Commission’s commitment to the Sustainable Development Goals of the UN 2030 Agenda for Sustainable Development, represents a major milestone by introducing unprecedented harmonised requirements on sustainability-related disclosure in financial products to a multitude of financial market actors and advisors.

The reporting obligations in this respect apply to multiple entities, including (i) alternative investment managers, (ii) qualified private equity fund managers, (iii) pension product manufacturers and providers of pan-European individual retirement products, (iv) insurance companies and insurance intermediaries that distribute insurance-based investment products, and (v) investment firms and credit institutions that provide portfolio management and investment advice.

Such entities are classified either as financial market participants or financial advisers, depending on their role in the conception, governance, provision and/or placement of the financial products, such classification then impacting their respective duties in terms of ESG disclosure.

The big question: Article 8 or Article 9?

Among other duties, Article 6 of the SFDR includes obligations on financial market participants and financial advisers to disclose in the pre-contractual information regarding the financial product information on the impacts on sustainability risk in the performance of their activities and on the returns of the products.

The exact elements to be made available under the ESG pre-contractual information of financial products depend however on the category of financial product – in particular whether the product is one that “promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices” (Article 8 of the ESG Disclosure Regulation) or one that “has sustainable investment as its objective and an index has been designated as a reference benchmark” (Article 9 of the ESG Disclosure Regulation).

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