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TCFD and SFDR requirements

Insight 18 December 2020

TCFD and SFDR requirements

The need for the global community to act on climate change has been clear for a number of years. In this briefing note we consider the key requirements of TCFD and SFDR.

One of the most significant milestones to date was in December 2015, when nearly 200 Governments signed the “Paris Agreement”, with the headline aim of “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels”.

To achieve the aims of the Paris Agreement requires both the reduction in greenhouse gas emissions and rapid transition to a lower-carbon economy. One immediate challenge was the lack of consistent and transparent reporting, which could help investors, lenders and wider stakeholders engage with companies on the risks and opportunities presented by climate change.

In June 2017, the Taskforce on Climate-related Financial Disclosures (TCFD) presented its final report on recommendations designed to help businesses disclose climate-related financial information. The Taskforce comprised 32 members from across the globe. In December 2019, new regulation from the EU on Sustainability-related Disclosures in the financial services sector (the SFDR) entered into force and become applicable from March 2021. This has been further supplemented by the Taxonomy Regulation which entered into force from June 2020, which includes staggered application from January 2022.

The disclosure regulation is thus approaching thick and fast. In this briefing note we consider the key requirements of TCFD and SFDR.

The Taskforce on Climate-related Financial Disclosures was established by the Financial Stability Board to develop recommendations for more effective climate-related disclosures. Four widely adoptable recommendations on climate-related financial disclosures applicable to organisations across sectors and jurisdictions were developed.

The core operational elements to organisations are:

  • Governance
  • Strategy
  • Risk management
  • Metrics and targets

Recommended disclosures and guidance were included within the full report.

The Taskforce further recognised the need for supplemental guidance for certain groups within the financial sector and also to non-financial groups. The Taskforce recommends that all organisations with public debt or equity implement its recommendations.

In the 2020 status report of the TCFD, published October 2020, the Chairman noted encouraging progress, with over 1,500 organisations expressing support and public sector progress being made across the world. Canada, Chile, the European Union, Hong Kong, Japan, New Zealand, the UK, Singapore, and South Africa were all named for making significant progress in the last year.

On 9 November 2020 the UK became the first G20 country to make TCFD-aligned disclosures mandatory across financial and non-financial sectors, which will be effective 2025, with a number of requirements mandatory from 2023.

The Sustainable Finance Disclosure Regulation is applicable to EU Member States. The SFDR drives disclosures within the documentation for a financial product, such as an alternative investment fund and also on the websites of asset managers.

SFDR for Financial Market Participants (using AIFM’s as an example):

  • AIFM’s must publish on their websites information about their policies on the integration of sustainability risks in their investment decision making process
  • AIFM’s must publish and maintain on their websites, a statement on due diligence policies regarding the principal adverse impacts of its investment decisions on sustainability factors
  • AIFM’s must also include in their remuneration policies information on how those policies are consistent with the integration of sustainability risks. This needs to also be published on their website

The second listed requirement above is one of a number of ‘comply or explain’ obligations. Thus, if an AIFM did not consider such factors, it needs to explain why.

SFDR for Financial Products (using an AIF as an example):

  • A clear and reasoned explanation of whether, and if so, how the AIF considers principal adverse impacts on sustainability factors
  • Where such factors are considered, a statement that information on principal adverse impacts on sustainability factors is available in the AIF’s annual report

Further disclosures are required where the AIF has a specific sustainability characteristic:

  • Article 8 of SFDR describes financial products (such as an AIF), which promotes, among other characteristics, environmental or social characteristics
  • Article 9 of SFDR describes financial products, which have sustainable investment as an objective. It includes specific requirements for financial products which has a reduction in carbon emissions as its objective

The SFDR defines key terminology including ‘sustainable investment’, ‘sustainability risk’ and ‘sustainability factors’. Broadly, disclosures are required on websites, in annual reports and pre-contractual disclosures will be required within or appended to the prospectus.

The majority of SFDR obligations apply from March 2021. The ‘E’ of ESG has been prioritised. Draft regulatory technical standards on climate and other environment-related impacts, have been delayed but will be published in due course. Expected by December 2021 such regulatory technical standards will also be published in relation to social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

The disclosure regulation is one part of the picture. As disclosure regulation is implemented, climate-related issues should become mainstream business and investment considerations. The disclosures will deliver more complete and comparable information to the financial markets and ultimately drive behaviours.

How can Sanne help?

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Sanne provides 3rd party AIFM services to €36bn of Committed Capital, across private equity, private debt, real estate and infrastructure and we have been working with clients and advisors through 2020 to prepare for the new SFDR requirements. Should you require our expert team to advise on any of our services available, we would be delighted to speak with you to discuss how Sanne can assist. Please contact Simon Vardon or Christian Hertz directly.

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Simon Vardon Global Head of Real Assets - Jersey
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Christian Hertz Managing Director, Head of Sanne LIS S.A. - Luxembourg
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