An economic activity qualifies as contributing to environmental or social objectives only if the investment meets all three SFDR conditions: 1. It contributes to an environmental or social objective. 2. It does not significantly harm any such objectives. 3. The company follows good governance practices. SFDR does not define what “contribution,” “DNSH,” or “good governance” must look like, the fund must define and justify its methodology. A transition plan alone is not enough to claim contribution.
How should “investment in an economic activity that contributes to an environmental objective” or “investment in an economic activity that contributes to a social objective” in Article 2, point (17), SFDR be interpreted? Are any (or all) of the following features sufficient for an economic activity to meet the definition of Article 2, point (17) SFDR, i.e. to contribute to an environmental (or a social) objective? a) should the economic activity being carried out by the investee company in itself contribute to an environmental or social objective (for example, an issuer investing in micro-finance activities in the developing world to assist in the development of socially disadvantaged communities)?; and/or b) can any economic activity potentially contribute to an environmental or social objective simply because it is carried on in a sustainable manner by the investee company (examples: (1) an investee company manufacturing a product in a more environmentally sustainable way than its peers/the sector, or (2) an undertaking that stands out for its social impact, for instance through its HR management or the representation of women); and/or Can any economic activity contribute to the general environmental objective of climate change mitigation if it is only covered by a transition plan (for instance a plan aiming to reach climate-neutrality based on the ACT methodology)?
In order to qualify as ‘sustainable investment’ as defined in Article 2, point (17) SFDR, a financial product must (1) be invested in an economic activity that contributes to an environmental or social objective, (2) not significantly harm any of those objectives; and (3) ensure that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance. The SFDR does not set out minimum requirements that qualify concepts such as contribution, do no significant harm, or good governance, i.e. the key parameters of a ‘sustainable investment’. Financial market participants must carry out their own assessment for each investment and disclose their underlying assumptions. This policy choice gives financial market participants an increased responsibility towards the investment community and means that they should exercise caution when measuring the key parameters of a ‘sustainable investment’. Furthermore, investments considered as ‘sustainable investment’ under Article 2, point (17) SFDR shall not significantly harm any of the objectives referred to in that Article. Therefore, referring to a transition plan aiming to achieve that the whole investment does not significantly harm any environmental and social objectives in the future could for instance not be considered as sufficient.
European Commission
