SFDR pre-contractual templates: ongoing attention required! 

If your company has been woking on creating the mandatory SFDR templates, you have probably read the AFM’s research report “Clear templates needed for sustainable investing“!

Haven’t gotten around to it yet? Here you can quickly catch up on what the AFM’s findings were.

What does the AFM expect? 

The AFM expects companies that do not currently comply with the basic requirements (level 1) of the SFDR to take immediate action to comply in the short term. Companies that make insufficient efforts to comply will be addressed. In addition, the AFM attaches great value to the information provided with the standardized templates and expects all companies in scope to use them. This is because the quality and reliability of the sustainability information is essential for investors to select the right financial products. 

The results of the self-assessment are based on self-reporting by companies. This means that the AFM did not conduct an independent investigation into the accuracy of the answers given. The focus of the survey was on the presence of mandatory sections, layout and understandability of information.  Furthermore, the self-assessment mainly asked whether certain information is present and whether certain process steps have been carried out. The report provides no insight into the quality of information or execution. The screening of the templates focuses only on how they are completed. Whether the information provided therein, such as for example the investment strategy followed, corresponds to what the company carries out in practice, was not part of this investigation.

In this article, we build on the AFM’s key findings regarding the SFDR pre-contractual templates and provide concrete guidance on how to complete them. We also discuss the AFM guidance for completing a pre-contract template. Finally, we update you on the latest developments surrounding the SFDR templates.

Pre-contractual product information and the template (Annex II & III) 

According to the AFM, the use of the template for pre-contractual information is generally going well. However, the information presented in the template does not always meet the set conditions. The AFM report reveals that the information provided is often still difficult to understand. This is partly due to the use of language that is too vague and/or general. Also, the presentation of this information sometimes does not meet the set requirements, or the template cannot be found on the company’s website. 

The results of the self-assessment show that a significant portion of companies do not commit to making sustainable investments within their products with sustainable characteristics (Article 8). They often report a minimum percentage of 0% or indicate that they do not have the data to determine this. However, the lack of data should not result in companies failing to specify a minimum percentage of sustainable investments in the pre-contractual information. The AFM encourages companies to continuously collect and evaluate data to determine and monitor the proportion of sustainable investments. This is an important factor for investors interested in the financial product.

In this video (in Dutch), we explain how the template for pre-contractual product information Level II SFDR needs to be completed.

Guidelines for completing a pre-contractual template 

The AFM expects companies to ensure that pre-contractual information in the templates is accurate, clear, non-misleading and balanced. The AFM Guidance on Sustainability Claims provides guidance to ensure that sustainability-related information meets these standards. 

To help companies, the AFM has included guidelines and examples in the research report. Although these guidelines may seem straightforward, we often see them incorrectly applied in practice. It is therefore good to consider these guidelines. Below we highlight some key points. 

Presentation of information

• Follow the template’s format as much as possible, adjusting only the font size, type and colors. 
• Maintain the order of and do not add headings. Remove sub-headings that are not applicable. This is also intended to promote comparability of templates for the investor. If a different order of headings is maintained, it is less likely to be recognizable and more difficult for the investor to compare.
• Use the prescribed charts, tables and other visualizations to present data in a clear and understandable way. This makes it easier for investors to compare different products.
• Check (at the top) of the template the correct options. This seems logical, but in practice we often find that the wrong checkbox is selected.

Information in the sections 

• Formulate as specifically as possible what the sustainable characteristics or objectives are. It is still common for descriptions of the sustainable characteristics or objectives to be too broad or general. Such descriptions give the investor too little insight into how a product fulfills the sustainable characteristics or objectives. Thus, it is not allowed to use general wording, such as contributing to the SDGs
• Use relevant sustainability indicators to measure performance. Select indicators that are relevant to the sustainable characteristics or objectives of the product, and specify what is being measured, such as the percentage of avoided CO2 emissions.
• Use reliable and verifiable sources. Again, it is important that the product’s sustainability claims can be validated. So, use sources that can be used to measure the product’s sustainability performance.
• Ensure that the pre-contractual and periodic templates align.

Comprehensibility of information

• Avoid vague terms and provide concrete examples (Guide to Sustainability Claims can serve as a checklist). Terms such as “kind of,” “as much as possible,” “sectors not known to be sustainable” are too vague and do not make it clear what a product is committing to. Also, vague terms make it difficult to measure the extent to which sustainability performance has been achieved. In addition, this also does not promote understandability for the investor.
• Formulate clear and concrete “binding elements” with appropriate ESG indicators to measure them. There should only be elements in the pre-contract template to which the product is minimally committed. If an element may be exceeded, it is not a binding element and should not be in the template.
• Ensure all relevant information is included in the template. Investors should find all necessary information in the template without needing additional documents for an informed decision. References to other documents are only allowed if all relevant information is in the template.

Website

• Publish the templates on a public website. Pre-contractual and periodic templates are often not placed on public websites, particularly for bespoke portfolio management or investment funds not offered to the public. However, even in these cases, templates must be published. The AFM has indicated that for portfolio management, reporting based on a model portfolio may be acceptable. 

Update regularly to remain compliant with new and changing regulations and market conditions. Establish a process to ensure periodic review of sustainability information. This can also ensure that marketing communications are aligned with sustainability information.

The SFDR Templates require continuous attention

On Dec. 4, the ESAs published a report recommending adjustments to the current Level 2 requirements, including the introduction of a new “dashboard” with a simple summary of key information. This report is currently awaiting approval by the European Commission. You can read an overview of the proposed changes in this article. In this article, we restrict our discussion to the proposed ‘simplified’ SFDR product templates.

The templates will be simplified by rearranging the information and removing the green color from all input fields except taxonomy charts. A special dashboard is introduced to make disclosure more understandable and less complex, with key information on the first page and detailed information on subsequent pages. The dashboard indicates whether a financial product has a sustainable investment objective or promotes environmental and/or social characteristics and includes four key elements: (i) sustainable investments, (ii) taxonomy-aligned investments, (iii) consideration of principal adverse impacts (PAIs), and (iv) greenhouse gas emission reduction targets. Furthermore, icons indicate whether the financial product contains any of these elements. Additionally, most questions have been rewritten or otherwise improved for clarity.

Due to this restructuring and the addition of the dashboard, existing texts must be modified in certain places. The ESAs also propose revising the templates regarding language, layout and structure to enhance comprehensibility. The information must be available in inline XBRL-format so that it is machine-readable, and there will be a new requirement for companies engaging in sustainable investments to describe thresholds and criteria that determine that these investments do not significantly harm other environmental or social objectives.

Need help?

The AFM expects companies to pay ongoing attention to the quality of the sustainability information provided in the product templates. In its future supervision, the AFM will place even more emphasis on the quality and reliability of the sustainability information provided. So, make sure that the information presented is of such quality that it is transparent and unambiguous for the target group of the financial product!

The ESG experts at Projective Group have been supporting companies in drafting SFDR templates since the SFDR came into effect. So, feel free to contact us without obligation to see what we can do for you!