On 10 November 2022, the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten, the AFM) published the results of an investigation it conducted on the status of compliance of financial undertakings with the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088, SFDR) and the related Taxonomy Regulation (Regulation (EU) 2020/852). The report covers its findings into each of the three groups of financial undertakings it investigated: (1) banks, investment firms and insurers, (2) UCITS managers and managers of alternative investment funds (AIFMs) and (3) pension funds and premium pension institutions (PPIs). For each group, the AFM identified certain areas of improvement and these are summarised below.

Banks, investment firms and insurers

The AFM provides four points in relation to which banks, investment firms and insurers should enhance their compliance with the SFDR and the Taxonomy Regulation:

  • Clearer sustainability information
    SFDR information on the websites of these entities is often vague, repetitive and described in general terms. The AFM calls on these entities to verify whether the information they provide is correct, clear and not misleading in line with the general requirement for the provision of information in the Act on the Financial Supervision (Wet op het financieel toezicht, AFS).
  • More specific sustainability information about the investment policy
    The sustainability risk policy is not specific enough when it comes to the management of sustainability risks. For instance, the remuneration policy should provide how it discourages employees to take such sustainability risks. In addition, an explicit declaration on how a firm incorporates a negative sustainability impact in its investment decision is often missing. Sustainability risks (events that can negatively impact investments, such as heat waves or floods) should be clearly distinguished from unfavourable effects on sustainability factors (the manner in which investments negatively impact factors such as the environment).
  • More specific pre-contractual information
    Pre-contractual information should be published on entities’ websites. The information on sustainability characteristics should be focused on a specific product, instead of a general description. The SFDR prescribes that periodic reports on the promotion of environmental or social characteristics and of sustainable investments must be published periodically. Despite this requirement being applicable since 1 January 2022, the AFM did not find that any of the entities it investigated published such a periodic report.
  • More extensive information on the Taxonomy Regulation
    Entities seem to be providing little or no information on the Taxonomy Regulation. As of 1 January 2022, it is required to report on two of the six environmental objectives. From 1 January 2023, this applies to all six objectives. The AFM expects market parties to continue to make efforts to meet the requirements in the Taxonomy Regulation.

UCITS managers and AIFMs

Three main conclusions are the result of the AFM’s investigation on SFDR compliance by UCITS managers and AIFMs:

  • Clearer information on the integration of sustainability risks in policies of managers
    Information on the integration of sustainability risks in the investment decision process of managers should be described specifically, instead of in general terms. This also applies to the remuneration policies of managers.
  • Fund classification changed
    The AFM established that, as a result of the publication of the Regulatory Technical Standards (RTS) under SFDR, the fund classification of many Article 9 funds (with sustainable investment as their objective) changed to Article 8. Article 8 funds are funds that do not have sustainable investment as their objective, but do promote sustainable characteristics. This is a broader category which is more suitable for funds that do not focus exclusively on sustainable investment.
  • Lack of data for transparency requirements in the Taxonomy Regulation
    Although managers do publish the required disclosures under the Taxonomy Regulation, almost all funds disclosed that 0% of their investments are in line with the Taxonomy criteria. The main reasons for this is that there is a lack of reliable data to establish whether these criteria have been met. The AFM states that it acknowledges that such quantitative data is not yet available and that it will takes this into account in its supervision.

Pension funds and PPIs

The AFM has four points of feedback for pension funds and PPIs:

  • Clearer sustainability information
    Pension funds and PPIs should provide a clear explanation of the sustainability related terms in the information provided by them. The AFM recommends testing the comprehensibility of this information with participants.
  • More specific sustainability information
    As also applies to other market parties, the information published on the website of pension funds and PPIs should be more specific. A general description is not sufficient, it should be clear which steps are undertaken to mitigate sustainability risks. This also applies to the remuneration policy.
  • More specific pre-contractual information
    Almost all participants have a pension scheme that promotes sustainability characteristics. Pension funds and PPIs should provide a clear and specific explanation of these characteristics and explain how these characteristics are complied with.
  • More extensive information on the Taxonomy Regulation
    Pension funds and PPIs should describe how their investments contribute to environmental objectives, including a percentage of the investments in activity that are within scope of these investment objectives. In many cases, this disclosure is missing, the main reason for which is the lack of reliable data on the Taxonomy criteria.

The AFM expects market parties to assess whether the findings of the investigation apply to them and to take these into account when further implementing the requirements in the SFDR and Taxonomy Regulation and the RTS published in relation thereto.

The reports are available here (Dutch only, an English summary of the reports should be available shortly).