The EU Sustainable Finance Disclosure Regulation (the SFDR) is one of the legislative outcomes of the European Commission's action plan on financing sustainable growth set in 2018.

The regulation was adopted and published in the Official Journal in 2019, and its Level 1 requirements came into force from 10 March 2021. The Regulation also has Level 2 Requirements, which enter into force on 1 January 2023, and emanate from a series of Delegated Legislation in the form of Regulatory Technical Standards (RTS) currently in process of development by the European Commission (EC).

Those two broad categories can be further divided into entity-level and product-level requirements. While entity-level disclosures require the firm's manager to comply with them, product-level disclosures apply to financial products (e.g., funds) which are being marketed by the firm starting 10 March 2021 (i.e., the date of entry into force of Level 1 SFDR requirements).

Level 1 requirements can be segregated into entity-level and product-level requirements. While the former are disclosure requirements on the current measures employed by the firm as a whole, the latter relate to measures conducted to assess the specific product (i.e., a specific fund you make available).

Entity-level requirements are the first step towards ensuring that your PE firm is compliant with the Level 1 SFDR requirements, and can be further segregated into four categories:

i) sustainability risk disclosure

ii) principal adverse impact statement

iii) remuneration policy update to include consideration of sustainability risk, and

iv) updating marketing communications accordingly.

You will first need to design a policy to integrate sustainability risks into the investment decision-making process. This requirement is specified in Article 3 SFDR.

This means you need to determine whether and to what extent your firm currently integrates sustainability risks into the various stages of the decision-making process. Depending on how much you already do on such issues, you're required to make a (potentially Board-level) formal decision on the new (or amended) implementation.

This means you also have to update your due diligence and risk management policies and processes accordingly.

Finally, you will need to draft disclosures, for both your website and your prospectus disclosures.

For further information, please consult this article on 'Sustainability Risk Disclosures'.

Next, you are required to make a decision for the consideration by your firm of the principal adverse impacts of its investment decisions on sustainability factors.

This requirement, specified in Article 4 SFDR, allows you to choose to either comply with the consideration, or explain the reasons for non-consideration of the Principal Adverse Impacts (PAIs).

If you decide to explain reasons for not considering the PAIs, you have to publish an Express Negative Statement, published in a separate section of your website called 'No consideration of sustainability adverse impacts'.

The latter must begin with a prominent statement clarifying that you do not consider adverse impacts of your investment decisions on sustainability factors. The explanation must also include a clarification on the processes you have in place to review such decision, and reasons for not considering the PAIs currently.

If you decide to comply with the consideration of the PAIs, you will need to implement or update policies in place concerning integration of ESG metrics, and make the required alterations to the processes and mechanisms to gather the required sustainability data and reflect that in your relevant policies.

Finally, you will need to draft a PAI statement, which follow a structure requiring you to disclose descriptive information on the identification and prioritisation of you PAIs and policies in place to incorporate those, brief summaries of engagement policies and compliance with internationally recognised standards.

The PAI Statement's qualitative chapters (4 out of 5) is Level 1 requirement and therefore had to be disclosed in March 2021, however the quantitative metrics are Level 2 and will be tackled below.

For further information on the PAIs, please consult the following articles on:

What are the PAIs?

Voluntary Principal Adverse Impact Indicators

Examples of PAI Statements

Description of Policies for Incorporation of the PAIs

Engagement Policies, or

Reference to International Standards.

The third step in becoming Level 1 entity-level SFDR compliant is to update your remuneration policy accordingly to become consistent with the incorporation of sustainability risks, and to include consideration of such metrics into the determination of remuneration at employee level. This step is specified in Article 5 SFDR.

For this, you need to determine the level of amendment you want to have your remuneration policy undergo, and update the latter accordingly. Once we review the correct updating thereof, you can draft the required website disclosure.

To learn more about the requirements for your Remuneration Policy, please refer to this article on 'Incorporating Sustainability Risk into the Remuneration Policy'.

Finally, the last step of becoming entity-level compliant is to review all marketing communications to make sure they are consistent with information concerning sustainability considerations as disclosed in accordance with the SFDR.

For this step, you need to identify the team(s) vested with the responsibility of planning and executing this project. Suitable teams for this exercise can be Marketing, Product or Compliance teams, among others.

The team(s) need to provide a list of all current and prospective marketing materials issued by your firm. This can include website publications, presentations, teasers, due diligence questionnaires, or pitch books, among other marketing tools.

Next, the team(s) need to deliberate on a plan to review all identified materials to ascertain that they do not contradict the disclosures and definitions emanating from the SFDR.

Finally, they need to update all materials accordingly and ensure that such amendments have been communicated with all relevant internal and external parties (e.g., third-party distribution networks).

In this step, as there is no specific disclosure to be made but rather a long review process of disclosures, we will provide you with guidance on how to plan a project to review your firm's marketing materials.

If you decide to have an Article 8 or Article 9 product, additional disclosures will need to be made for each of those products.

You will be required to upload a Website statement, which includes many chapters on showcasing how the Fund in question incorporates sustainable characteristics (Art.8 product) or aims to meet a sustainable objective and therefore makes sustainable investments (Art.9 product).

Level 1 requires the website disclosures publication by March 2021, along with the prospectus disclosure for Funds with social characteristics/objectives.

If your Fund aims to meet an environmental characteristic/objective, the deadline for the prospectus is moved to 1 January 2023.

As explained above, if your Fund is environmentally-focused, you will need to disclose your prospectus disclosure (annexed to the prospectus) on the sustainable nature of your Fund will need to be disclosed by January 1st 2023.

This date marks the beginning of SFDR's 'Level 2' scope entering into force. On top of this prospectus disclosure, two more disclosures need to be released by the Fund-Manager once Level 2 begins.

These are the quantitative part of the PAI statement, which is to be disclosed by the 30 June 2023. This is the deadline for reporting on the PAI indicators for the previous reference year (i.e., January until December 2022).

Finally, the deadline for the SFDR prospectus disclosure (annexed to the periodic statement) needs to be disclosed at the time of the periodic statement usual publication, with the deadline being 30 June 2023 as well.

For a better understanding of SFDR's product classification, please refer to this Article on 'Product Classification per Article'.

For an illustrative understanding of the 'entity' v. 'product' categorisation, please refer to this article on 'SFDR: Entity and Product Level'.