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Lessons from the first year of SFDR reporting


The first year of any new regulatory paradigm is challenging, as all stakeholders involved look to find their feet. A recent Novata and Private Equity Wire webinar with senior ESG leaders within the private markets space revealed that SFDR has been no exception.

Keeping pace

Defining the framework has been a central challenge. Ambiguous to begin with, SFDR stipulations have been updated periodically, keeping fund managers perpetually in ‘catchup’ mode. 

“We spent a long time building out our compliance processes, and within three months of finalising, the regulator had announced a new template. It’s not a deal breaker, but it did mean we had to change our processes, spend more legal time and resources, and educate investors all over again about what the changes meant,” says Emilie Huyghues Despointes, ESG Officer at MV Credit. 

Smaller organisations are feeling the impact. “Even classifying an asset under Article 8 or Article 9 requires not just an understanding of SFDR, but also of EU taxonomy 2020 and other interlinked regulations, which poses a sizeable burden to a business that doesn’t have the capacity for a dedicated ESG resource,” says Alan O’Dea, Associate Director and member of the ESG committee within the investment team at Beechbrook Capital.

Some other pain points that came up in the panel discussion: misalignment in the timing required for various disclosures, which means information is often missing; the pressure of periodic disclosures; the rigorousness of Principal Adverse Impact disclosures; the absence of data on small and middle market portfolio companies; the dependence on PE firms and portfolio companies to be compliant, and the burden placed on these companies to produce reportable data.

Despite these challenges, panelists agreed that the direction and goal of SFDR is positive – a transparent system that can allow investors to compare sustainable assets can transform the world of impact and ESG investing.

According to O’Dea, growing clarity around SFDR, its definitions, and disclosure requirements will increase the appeal of Article 8 and Article 9 classifications, as more firms will feel confident in making those classifications. 

Additionally, Phil Davis, Director of ESG at Helios Investment Partners, says that the steady realisation that impact investments are producing commercially viable, even competitive, returns will also boost appeal.

Words to the wise

As more firms get started with SFDR reporting, the experts shared their top tips and advice based on learnings from a challenging first year.

Periodic reporting of performance against the sustainability objectives laid out in pre-contract disclosures, as stipulated by SFDR, is a significant source of pressure for firms. Before embarking on the journey, firms should spend time thinking about the objectives they want to deliver. These should be robust enough to deliver a tangible positive outcome, but also cautious, practical and achievable. 

Once defined, these objectives bring value throughout the investment lifecycle – from due diligence of an asset and ensuring it can deliver value to subsequent performance measurement and periodic reporting. 

That said, it’s crucial to check whether data to measure performance will be retrievable from portfolio companies and feasible to gather. It’s equally important to make sure firms’ internal systems are equipped to process and analyse this data.

What will help, the experts all agreed, is a holistic approach to ESG. This includes buy-in from senior leadership and a focus on good governance practices. It also means ensuring that ESG and sustainability risks are fully integrated into the conventional investment analysis approach. As noted by Despointes, SFDR is the end goal, but firms’ main focus should be making sustainability a part of their investment process.

Helping hands

The panel was also unanimous in their appreciation of third-party support at various stages in the process. Most set out with the intention of managing SFDR compliance in-house but quickly realised they needed help. 

Legal support is crucial – lawyers can advise on how firms’ existing products can be classified as Article 8 or Article 9, and what existing metrics/objectives can and should be included in pre-contractual disclosures. They can also help understand any particularly ambiguous definitions.

Leaning on guidance from climate and sustainability experts and technology can also help with setting and identifying impact goals and measurement processes to ensure that investments are delivering value, cause no significant harm, and meet all minimum governance standards.

“As SFDR, and regulation more broadly, continue to evolve, it inevitably creates complexity for practitioners in private markets,” says Gence Emek, Commercial Lead, UK and Nordics at Novata, who moderated the webinar discussion. “I’m seeing more and more private capital firms finding value in digitising their entire end-to-end process for SFDR with the added support of experts to meet the needs of regulators and investors.”

Finally, the panel considered the use of third-party data aggregators in the future, who could help collect overarching data on Principal Adverse Impact indicators, risk management and value creation, as well as performance data on portfolio companies that fall in the small to middle market range.

As firms prepare for a new year of SFDR reporting, leveraging appropriate technology and expertise can help them improve efficiencies and collect high quality data required for compliance.
Learn more about how Novata supports firms with SFDR reporting.

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