The third AFM report on SFDR compliance signals tightening enforcement and highlights a shift in supervision towards the quality of disclosures
A recent report of the AFM underlines its focus on monitoring SFDR compliance, signals tightening enforcement action against those lagging behind, and highlights a new phase of supervisory attention for clear, accurate and reliable SFDR disclosures.
Introduction
The Dutch Authority for the Financial Markets (Autoriteit Financiële Markten; AFM) recently published its third report on compliance by financial market participants (FMPs) domiciled in the Netherlands with the Sustainable Finance Disclosure Regulation (SFDR)1. The report demonstrates that compliance with the SFDR remains a key supervisory priority of the AFM. It is apparent from the report that the AFM is stepping up its enforcement actions. For the first time, the AFM has indicated that it has addressed individual undertakings that do not comply with the main requirements of the SFDR. The AFM also provides general recommendations in the report, signalling the next points of attention in the AFM's supervision of the SFDR. The AFM invites FMPs to review their compliance with all requirements of the SFDR and the Taxonomy Regulation (TR), and particularly to review the quality and reliability of their disclosures in the reporting templates.
In the final paragraph of this short read, we set out suggested actions for Dutch FMPs.
Scope of the AFM review
The AFM has conducted a comprehensive study into the compliance of the Dutch financial sector with the SFDR: 115 fund managers, 97 asset managers, and 155 pension providers were requested to self-assess their compliance with the main requirements of the SFDR (the ‘Level 1 requirements’), on both an entity level and a product level. Moreover, the AFM has reviewed a selection of SFDR disclosure documents to assess the quality of the disclosures and their compliance with the SFDR and TR Delegated Regulation (the ‘Level 2 requirements’)2.
The Level 1 requirements of the SFDR, effective since March 2021, contain the general rules that aim to give investors and advisers a better understanding of the sustainability-related aspects of investment policies and products on offer. The Level 2 requirements, effective since January 2023, provide detailed transparency requirements in relation to sustainability information and prescribe the use of standard templates for reporting on sustainability information.
Key findings of the AFM review
Based on the self-assessment by Dutch FMPs, the AFM finds that FMPs generally comply with the majority of entity and product-level requirements set by SFDR Level 1. However, the AFM also finds that some FMPs still report to be lagging behind. According to the AFM, this is unacceptable and the AFM urges these FMPs to update disclosures where necessary. Notably, the AFM has indicated for the first time that it has reached out to the individual FMPs that are lagging behind. With its first direct measures against particular FMPs, the AFM signals to the market that it is intensifying its enforcement of the SFDR.
Following the substantive review of a selection of reporting templates, the AFM finds that compliance with the Level 2 requirements is steadily improving, but that there is still room for improvement for a considerable group of FMPs. While the majority of FMPs are utilising the required templates for disclosures, the AFM observed that these templates often contain vague or overly general information. This lack of clarity diminishes the ability of investors to understand and compare the sustainability characteristics of financial products, harming the goals that the SFDR sets out to achieve. Moreover, some firms do not publish the prescribed templates on their websites, reducing general transparency in the market. Consequently, the AFM suggests that FMPs review their compliance with the Level 2 requirements, and particularly review the quality and reliability of their disclosures in the requisite reporting templates.
Some notable findings warrant the specific attention of FMPs. First, the AFM finds that FMPs often report that they have insufficient data to make obligatory disclosures. The AFM stresses that FMPs must make all reasonable efforts to obtain the required data. Second, the AFM finds that product level disclosures often do not adequately describe the likely impacts of sustainability risks on the financial performance of the product. Third, the AFM finds that a surprisingly large share of the financial products with a climate-related investment objective within the meaning of the SFDR do not have any ambitions to be Taxonomy-aligned. The AFM invites FMPs to review their TR ambitions and to make continuous efforts to obtain the relevant data. Lastly, the AFM urges FMPs to use the prescribed templates for the precontractual information, periodic reports, and the report on the adverse impacts of the financial product.
Next steps for FMPs
We recommend Dutch FMPs and other FMPs offering financial products in the Netherlands to review whether actions are required to keep up with the increasing supervisory expectations regarding SFDR compliance.
For FMPs that have reported in the self-assessment that they are non-compliant on one or more main requirements of the SFDR, we recommend updating the required disclosures as soon as possible, using effective communication strategies and providing meaningful transparency to investors.
For any FMP, we recommend analysing whether the general shortcomings found by AFM also apply to the FMP, or any of the products they offer. Particularly, this means reviewing whether (i) all prescribed templates are used for disclosures; (ii) missing data for compulsory disclosures can be obtained; (iii) discrepancies between SFDR and TR ambitions are justified in light of data availability and Taxonomy-eligibility of investments; and (iv) the likely impacts of sustainability risk are described in sufficient detail, while providing a quantitative substantiation where possible.
1 AFM, 'Clear SFDR templates needed for Sustainable Investing' (link)
