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ESG-ETF and SFDR

ETFs are not explicitly mentioned in the Sustainable Finance Disclosure Regulation (SFDR) as they are subsumed under investment funds. However, Art 8 and 9 of the Disclosure Regulation contain provisions concerning ETFs and define when an ETF is sustainable.

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SFDR

Art 8: Where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices, the information to be disclosed pursuant to Article 6(1) and (3) shall include the following:

(a) information on how those characteristics are met;

(b) if an index has been designated as a reference benchmark, information on whether and how this index is consistent with those characteristics.

Art 9: Where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark, the information to be disclosed pursuant to Article 6(1) and (3) shall be accompanied by the following:

(a) information on how the designated index is aligned with that objective;

(b) an explanation as to why and how the designated index aligned with that objective differs from a broad market index.

BaFin

BaFin has issued the following statement on ETFs (replication of a sustainable index):

If, according to the investment terms and conditions, a sustainable index is to be replicated as part of a passive investment strategy, more detailed explanations on the sustainability character of this index are required in the investment terms and conditions. A mere reference to the sustainability determined by the index provider is not sufficient.

When replicating a sustainably oriented index, it must be ensured in the investment terms and conditions that none of the environmental and social objectives specified in Art. 2 No. 17 of Regulation (EU) 2019/2088 or the environmental objectives specified in Art. 9 of Regulation (EU) 2020/852 are significantly impaired by the composition of the index. This can be realized by implementing appropriate exclusions. Furthermore, investments shall be made in securities of such issuers or portfolio companies that in their business activities comply with the governance aspects referred to in Art. 2 No. 17 of Regulation (EU) 2019/2088.

Summary

ETFs can also be sustainable according to the Sustainable Finance Disclosure Regulation and the MiFID 2 Delegated Regulation on ESG-preferences. However, a reference to an ESG index must be made or a subset of an existing index – which contains the sustainable securities of an index – must be defined. Contact us to make your ETF ESG-ready.

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Georg Tichy

Georg Tichy

Georg Tichy is a management consultant in Europe, focusing on top-management consultancy, projectmanagement, corporate reporting and fundingsupport. Dr. Georg Tichy is also trainer, lecturer at university and advisor on current economic issues. Contact me or Book a MeetingView Author posts