Key takeaways
Financial market participants offering financial products under SFDR's Articles 8 and 9 face many challenges in complying with the disclosure regulation. But the topic of "sustainable investments" is the one challenge for which the guidance seems to still be very unclear and, at times, even confusing.
The Sustainable Finance Disclosure Regulation (SFDR) in its Article 2 offers a conceptual framework, but it is up to the teams behind each financial product to create a full methodology to assess “sustainable investments”.
This undertaking is by no means a straightforward endeavor. Given the intricate nature of sustainable investments, Datia's team created a practical roadmap consisting of four essential steps to assist you in navigating this process. While this roadmap offers valuable insights, it should be viewed as just the beginning of your journey. Your team will still need to develop its own internal definitions and criteria.
If you require further guidance or have any questions, don't hesitate to reach out to our experts at hello@datia.app.
Steps to create a methodology for Sustainable Investments:
Step 1: Select KPI
Select the Key Performance Indicators (KPIs) that will work, in combination, to demonstrate how your financial product does the following:
a) Has a positive impact on the environment or on social aspects
b) Does not significantly harm (DNSH) the environment or/and society
c) Invests in institutions with good governance
Step 2: Apply thresholds
To each of the KPIs selected, apply numerical thresholds such as an absolute value to be achieved or a percentage above or below the values reported by your benchmark. Note that the use of PAI indicators is mandatory in order to assess DNSH.
Step 3: Dry run
Your KPIs and thresholds are the building blocks of your Sustainable Investments Methodology. Screen your portfolio in light of this newly created methodology to verify what percentage of Sustainable Investments is reasonable to commit to in the pre-contractual of your financial products. After all, the information in the pre-contractual is legally binding.
Step 4: Report
Once you completed the hard work of creating a methodology to classify sustainable investments, it is time to enjoy the fruits of your hard work. Sustainable investments are applicable to two SFDR templates: the pre-contractual and the periodic report. In the pre-contractual, you set out the minimum planned percentage of sustainable investments, whereas in the periodic reporting, you are supposed to disclose the actual outcome.
In addition to including the planned and actual percentage of sustainable investments, you also need to include background information on the methodology. For example, you will need to describe how and to which environmental or social objective the product is contributing, as well as how the DNSH aspect is ensured.
Note: After screening your portfolio against your methodology, you might reach a lower-than-expected proportion of Sustainable Investments. If that is the case, your financial product might not be ready to commit to a big percentage of Sustainable Investments just yet and your team might want to take this as a sign that it might be time to divest from bad-performing instruments and invest in more sustainable companies instead.
Therefore, you should interpret the Sustainable Investment screening process as a test of the sustainability health of your financial products.
Here's a simple infographic with the 4 steps. Feel free to download it and share it with your team.
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How Datia can help
Datia offers both data and software solutions for asset managers and wealth advisors to effectively assess sustainable investments.
Datia’s platform solves two challenges: first, in a step-by-step approach, it enables asset managers to create their methodology, choosing different indicators and setting thresholds; second, it allows asset managers to immediately evaluate what proportion of their portfolio is meeting their own criteria.
Read more about Datia's Sustainable Investments Screening solution.
