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The impact of SFDR and its relevance for SDG objectives

SFDR regulation entered in force in March 2021, supporting fund selectors with a precise classification of ESG strategies, in order to identify the purely sustainable.

Over the past few years, there has been a sharp Increase in the number of funds claiming to apply ESG analysis. The entry into force in March 2021 of the SFDR ("Sustainable Finance Disclosure Regulation") has identified clear guidelines to be applied for asset managers, both in terms of taxonomy and classification, in order also to avoid the risk for fund selectors of selecting unsustainable strategies and incurring greenwashing episodes.
Numerous funds that previously claimed to follow ESG criteria are actually classifying themselves as “Article 6” (i.e. mainstream funds with no explicit sustainability scope), and others have been required to change the fund’s name itself and to remove all references to 'sustainability' from it.
On the other hand, the number of funds that declare themselves as Article 9 is still relatively small.
In recent times we are witnessing a strong promotion of strategies in line with Articles 8 and 9, while the strategies of Article 6 seem to have so far strongly discouraged distribution and marketing.
Within SFDR framework, some of the crucial steps to concretely implement a positive screening approach have been reaffirmed and reinforced, such as the disclosure pillars of explicitly publicizing the screening criteria in the prospectuses and within the marketing literature, and the release of sustainability reporting.
In this context, the SDGs represent a reference framework for reporting on investment strategies from an ESG point of view. As a reminder, the United Nations launched in 2015 the 17 SDGs that were adopted by 193 countries. The SDGs outline a set of objectives to be achieved by 2030 that aim to end poverty, hunger and inequality, while tackling climate change, improving health and education and spurring economic growth.
The SDGs are playing a positive role for the Responsible Investment industry as a whole, as they contribute to raising awareness over Sustainability issues, and help establishing a common language among businesses and responsible investors.
In this context, FARAD Investment Management has developed an internal proprietary ESG scoring system applied to direct holdings and fund managers “GreenEthica Sustainable Scoring System”). It is based on the ESG analysis adopted within their investment processes, as well as its relevance for the final
decision on investments, with a specific positive screening based upon ESG integration on investments, which are aligned to the 17 SDGs. This service provides a reliable and objective way for investors to see how mutual funds, ETFs, equities and/ or bonds are meeting environmental, social, and corporate governance challenges. Moreover, GreenEthica Sustainable Scoring System provides to the investor also the measurable figures of how much its investment is contributing to the sustainable transition and to the achievement of the 2030 Agenda for Sustainable Investments of the United Nations.

 

Gianluca D’ALESSIO
Senior Portfolio Manager
FARAD Investment Management S.A.