SUPERVISORY REPORT

Clear SFDR Templates Needed for Sustainable Investing

In Brief

Financial firms must focus on clearer information regarding sustainable investing; SFDR templates are essential for this purpose. The more understandable the templates are filled out, the better investors, pension participants, and advisors can understand, compare products, or provide suitable advice. Most firms state that they comply with the basic requirements (Level 1), but a portion is still lagging behind. There is still work to be done regarding the use and completion of templates under secondary legislation. The AFM supports this with guidelines to further improve compliance.

---

SUPERVISORY REPORT

Table of Contents

• Summary 3
• 1. Introduction 5
  • 1.1 Sustainability Legislation 5
  • 1.2 Research Helps Firms Gain Insight into Their Status 5
  • 1.3 Research Methodology and Limitations 6
• 2. Overarching Observations 7
  • 2.1 Most Firms Have Information Available at the Entity Level 7
  • 2.2 Part of the Sector Reports on Negative Sustainability Impact 7
  • 2.3 All Firms Take Additional Steps to Obtain Data on Negative Impact 8
  • 2.4 Significant Portion of Products Lacks Information on the Effect of Sustainability Risks on Returns 9
  • 2.5 Majority Uses Pre-contractual Templates 9
  • 2.6 Majority States They Do Not Make Sustainable Investments 10
  • 2.7 Small Portion of Investments Aligned with the EU Taxonomy 10
  • 2.8 Inconsistent Picture in Periodic Reporting on Sustainable Performance 11
• 3. Guidelines for Completing a Pre-contractual Template 12
  • 3.1 Presentation of Information 13
  • 3.2 Information in the Sections 13
  • 3.3 Understandability of Information 14
  • 3.4 Website 14
• 4. Fund Managers 15
  • 4.1 Product Landscape of Investment Funds 15
  • 4.2 Key Findings 17
• 5. Wealth Managers 19
  • 5.1 Product Landscape of Wealth Management Portfolios 19
  • 5.2 Key Findings 21
• 6. Pension Executives 24
  • 6.1 Product Landscape of Largest Pension Schemes 24
  • 6.2 Key Findings 26
• 7. Conclusion 29
  • 7.1 SFDR Developments 29
  • 7.2 Future Outlook 29
• Appendix 1 - Research Methodology 30
  • Part 1: Self-assessment 30
  • Part 2: Scan of Product Templates 30
  • Limitations of this Research 30

---

SUPERVISORY REPORT

Summary

More and more investors wish to contribute to the transition to a more sustainable economy through their investments. The financial sector makes this possible by offering suitable products and being transparent about sustainability aspects. The Sustainable Finance Disclosure Regulation (SFDR) obliges financial market participants and financial advisors to be transparent about the sustainability aspects of their investment policies and products and to provide investors with clear and comparable information.

The AFM investigated via a self-assessment among 115 fund managers, 97 wealth managers, and 155 pension executives to what extent the SFDR and the secondary legislation introduced in 2023 are being complied with. Most firms state that they comply with the basic requirements derived from Level 1 of the SFDR. A portion of the firms is still lagging behind. The secondary legislation, which provides further elaboration on the SFDR, obliges firms to use, among other things, templates for providing information on the reduction of negative impact and on products with sustainable characteristics or objectives. Particularly regarding the use and completion of the various templates, the sector still has work to do. The AFM provides guidelines in this report to improve this.

Most firms say they comply with basic requirements, product information not present everywhere

The self-assessment shows that a large majority of firms comply with the basic requirements of Level 1 of the SFDR at the entity level. At least 91% of firms have a policy statement on sustainability risks on their website, at least 87% have a statement on their website regarding whether they take into account the negative impact of investments, and at least 81% have a remuneration policy aligned with the integration of sustainability risks. However, this also means that not all firms have this information available.

The AFM sees important points of attention regarding product-specific information. Firms state that they provide information for at least three-quarters of their products on how they handle the integration of sustainability risks. However, additional information on the potential impact of sustainability risks on the product's return is missing for a portion of these products. Furthermore, periodic reporting for products with sustainable characteristics or objectives is not available in all cases. Wealth managers are particularly lagging behind here. While pension executives and fund managers provide periodic reports for at least 85% of their products, these are present for only about 25% of products managed by wealth managers.

The basic requirements of Level 1 have been in force since March 10, 2021, giving firms sufficient time to comply. The AFM expects at this stage that all firms are compliant with the SFDR basic requirements. Firms that do not make sufficient efforts to comply will be addressed.

Majority of firms uses the mandatory templates

The AFM sees that firms are taking steps in the use of mandatory templates. For almost all products of pension executives and fund managers, for example, the pre-contractual templates have been used to provide sustainability information. Wealth managers do this for 73% of their products. Also, the majority of firms use the standard template to report on negative sustainability impact, namely two-thirds of wealth managers and nearly all pension executives and managers. A portion of these firms does not use the templates. The AFM calls on firms that do not yet use templates to take action.

Information in templates often unclear or too general

It is important that investors understand how firms give shape to the sustainability aspects of products and what promises are made in this regard. At present, the information provided in pre-contractual templates is often still difficult to understand. This is due, among other things, to vague and/or too general language. Also, the presentation of information sometimes does not meet the set requirements, or the completed template is not on the website. The AFM shares points of attention and guidelines in this report so that firms can further improve the use of and information in templates.

Templates as a cornerstone for sustainable investing

Secondary legislation obliges firms to use templates. The information therein must be correct, clear, and not misleading/balanced. It requires significant effort to get this in order, but it is essential. The better the templates are filled out, the better investors, pension participants, and advisors can understand, compare products, or provide suitable advice. Furthermore, the templates offer them more insight into the substantiation of sustainability claims.

Firms do not always report on mandatory sustainability data: negative impact

Firms state that they cannot always report on all mandatory sustainability indicators regarding the reporting on the negative impact of their investment decisions because they do not have the right data. If a company in which an investment is made does not make this data available itself, firms most often use external parties. Nevertheless, in some cases, firms do not report on all mandatory sustainability indicators.

The AFM calls on fund managers, wealth managers, and pension executives to make maximum efforts to obtain the desired data. It is not permitted to omit mandatory sustainability indicators in the report.

Furthermore, the AFM sees that the share of investments aligned with the EU Taxonomy and the share of sustainable investments of products with sustainable characteristics are often 0% or cannot be determined by firms. The AFM encourages firms to continue efforts to obtain the necessary data and to continuously evaluate whether the reported share is still appropriate. These are, after all, important indicators for investors to determine which products they wish to invest in.

Market view: number of funds and pension schemes with sustainable characteristics is rising

Based on the information from the self-assessment, market views on the product offering have been established. This shows that the number of funds and pension schemes with sustainable characteristics has increased. This is positive because, through a larger offering of products that provide insight into their sustainable characteristics, investors can select products or build wealth in products that fit their sustainability needs.

What does the AFM expect from you?

The AFM expects firms that do not yet comply with the basic requirements (Level 1) of the SFDR to take immediate action to comply in the short term. The AFM expects all firms to use the findings and guidelines provided in this report to further improve their information provision regarding sustainability. The quality and reliability of sustainability information is essential. It enables investors to select suitable products. Furthermore, the legislation regarding the provision of sustainability information is still in motion, and it is important that firms are aware of this and take the necessary action.

---

SUPERVISORY REPORT

1. Introduction

1. The AFM Consumer Monitor shows that half of the respondents are interested in sustainable investing.
2. As defined in Article 2, point 12 SFDR.
3. Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector.
4. Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088.
5. Commission Delegated Regulation (EU) 2023/363 of 31 October 2022 amending and rectifying Delegated Regulation (EU) 2022/1288.
6. As defined in Article 2, point 1 SFDR.

More and more investors wish to initiate sustainable change with their investments. Transparency regarding the sustainable characteristics and sustainability risks of products is therefore essential. It gives (retail) investors and advisors insight into sustainability characteristics and helps them make or advise on a suitable sustainable product choice.

The financial sector is taking up its role in the sustainability transition by providing correct, clear, and not misleading/balanced information about the sustainability of financial products (products) and by offering an increasing range of products that align with the sustainability needs of the investor or pension participant (hereinafter jointly: investor).

1.1 Sustainability Legislation

Since March 10, 2021, the Level 1 requirements of the Sustainable Finance Disclosure Regulation have been applicable. This regulation contains requirements for information provision regarding sustainability in the financial sector and aims to give investors and advisors more insight into the sustainability of the investment policy and the offered products. Furthermore, since January 1, 2023, the Level 2 requirements from the secondary legislation (Regulating Technical Standards) have been in force, which give more specific rules for transparency regarding sustainability. This legislation contains additional requirements regarding the presentation, methodologies, and design of sustainability information, such as standardized templates for reporting on negative sustainability impact and on the sustainability characteristics and objectives of products.

1.2 Research Helps Firms Gain Insight into Their Status

In 2021 and 2022, the AFM already conducted research on the Level 1 requirements among managers of investment institutions and managers of undertakings for collective investment in transferable securities (hereinafter jointly: fund managers), credit institutions, and investment firms (hereinafter jointly: wealth managers), and pension funds, pension insurance institutions (PIIs), and pension insurers (hereinafter jointly: pension executives). From these studies, it appeared that not all requirements were met. Based on these studies, the AFM provided points of attention to the market. The AFM expects that the sector now complies with the Level 1 requirements.

The goal of this new research is to gain a broad market view of where the financial sector stands in complying with the aforementioned legislation and regulations. Additionally, it looks at which points still require steps regarding the Level 2 requirements. This research helps the selected financial market participants (firms) to gain insight into their current status and what still needs to be done. Furthermore, the goal is to gain insight into how pre-contractual templates are filled out by firms and to formulate guidelines based on that. These templates are, after all, one of the most important ways to gain insight into the sustainable characteristics of a financial product. These insights can also be used by firms to further sharpen their own sustainability information.

Finally, based on this research, an overview can be made of the product landscape per type of firm. This overview provides insight into which transparency obligations the offered products fall under according to the firms themselves and which characteristics the products with sustainable characteristics or objectives have.

1.3 Research Methodology and Limitations

Part of the research was conducted based on a self-assessment. The results are based on self-reporting by firms. This means that the AFM did not conduct independent research into the correctness of the given answers. Furthermore, in the self-assessment, the question was primarily whether certain information (documents) is present and whether certain process steps have been executed. The result does not provide insight into the quality of information or execution. The research into the templates focuses on how they are filled out. Whether the information provided therein, such as the followed investment strategy, corresponds to what the firm actually executes in practice was not part of this research. Simultaneously with this research, the AFM is also conducting research into the integration of sustainability risks by fund managers in the context of an ESMA Common Supervisory Action. This research also partly focuses on the SFDR; the results of this research will be communicated separately. In the appendix of the report, you will find a more extensive explanation of the current research.

---

SUPERVISORY REPORT

2. Overarching Observations

From our research, several sector-overarching observations follow regarding the compliance with Level 1 and Level 2 requirements that are relevant for all types of firms. The most important observations are explained in this chapter. First, we address the transparency requirements regarding sustainability for the firm itself (the entity). Thereafter, we treat the (pre-contractual and periodic) transparency requirements regarding sustainability for the product.

2.1 Most Firms Have Information Available at the Entity Level

Most firms state that they comply with the Level 1 requirements at the entity level. For example, at least 91% of firms state that they have a policy statement on the handling of sustainability risks on their website. A policy statement must, for example, describe how firms address and monitor sustainability risks. Furthermore, 87% of wealth managers, 97% of pension executives, and 94% of fund managers have a statement on their website regarding whether they take into account the negative impact of their investment decisions on sustainability. Finally, 81% of wealth managers, 88% of pension executives, and 93% of fund managers state that they have integrated sustainability risks into their remuneration policy. The remuneration policy must not encourage the taking of excessive sustainability risks.

Although most firms comply with these Level 1 requirements, a small portion of firms does not yet comply. The AFM finds it unacceptable at this stage that Level 1 requirements are not yet fully complied with and will, where necessary, address firms on this.

Publish all mandatory sustainability information at the entity level on the website.

2.2 Part of the Sector Reports on Negative Sustainability Impact

Firms can reduce their potential negative impact on the environment, social matters, or governance, for example, by not investing or investing limitedly in companies that emit relatively much CO2 or that do not pay sufficient attention to human rights. Firms can also engage in dialogue with companies to steer them towards sustainability (engagement).

If firms take into account the negative impact of their investment decisions on sustainability, they are obligated to report on this annually. Think of greenhouse gas emissions, investments in areas with vulnerable biodiversity, and various indicators regarding working conditions (hereinafter jointly: sustainability indicators). In templates, they must indicate what negative impact their investments have and what measures they take to reduce this. They must do this for various mandatory sustainability indicators, and additionally, they are obligated to report on at least two optional sustainability indicators. This contributes to better transparency and helps investors, participants, and advisors make better-substantiated decisions or give advice.

Firms with more than 500 employees are obligated to report on the negative impact of their investment decisions. For smaller firms, this is a choice. Firms that do not take into account the negative impact of their investment decisions must make this known through a statement on their website.

The self-assessment shows that there are differences between fund managers, wealth managers, and pension executives regarding taking into account the negative sustainability impact of investment decisions. While 40% of fund managers and pension executives state that they take into account their negative impact, this percentage among wealth managers is 20%. Of the firms that report on their negative impact, a large part does so on a voluntary basis. All firms with more than 500 employees state that they report on the negative impact of their investment decisions.

Of the group of firms that states that they take into account the negative impact of their investment decisions on sustainability, 65% of wealth managers, 99% of pension executives, and 94% of fund managers use the mandatory template to report on this. The AFM calls on the firms that do not yet use this to do so.

Clearly indicate whether negative impact is taken into account. When reporting on the negative sustainability impact of investment decisions, use the template intended for this purpose.

Note: These firms do not have to report based on their size.

2.3 All Firms Take Additional Steps to Obtain Data on Negative Impact

To report well on negative impact, it is important to have the right data. The self-assessment shows that the sustainability data required for this is not always easy to obtain. If a company or real estate in which an investment is made does not make this data available itself, it is permitted to use other sources, such as external parties. If those sources also cannot provide data, a reasonable assumption may be made. In the self-assessment, all firms state that they make efforts to obtain data if it is not directly available. It appears that most parties use data from external providers or experts. Only fund managers state that they contact the companies in which they invest.

Nevertheless, the self-assessment shows that the templates are not fully filled out in all cases. For example, about a quarter (27%) of wealth managers using the template have not filled it out for all mandatory indicators. Additionally, 13% of wealth managers do not report on at least two optional indicators. Among pension executives, a small portion (6%) has not included information on the mandatory and optional indicators in the template. Of fund managers, 3% do not report on all mandatory indicators, and 8% do not report on at least two optional indicators. It is always mandatory to report on the mandatory and at least two optional sustainability indicators.

When data on sustainability indicators is not publicly reported by the companies in which an investment is made, other ways must be sought to obtain the data. This can be via external parties or, if necessary, via a reasonable assumption. Always fill out the template completely.

2.4 Significant Portion of Products Lacks Information on the Effect of Sustainability Risks on Returns

Due to climate change and societal developments, identifying sustainability risks is becoming more important. Sustainability risks are events regarding the environment, social matters, or governance that can have a negative effect on the value of the investment. Think of a fund that invests in agricultural companies, which can become loss-making due to extreme drought (physical risks). But also investments in CO2-intensive companies, whose value sees a decline due to the introduction of climate and environmental policy measures (transition risks).

For investors, it is important to know which sustainability risks belong to the product and what the possible effect is on the return. The SFDR obliges providers of products, regardless of whether they report on sustainability or not, to inform investors in pre-contractual information about the (significant)...