Fund Managers wanting to comply with the SFDR need to begin monitoring their sustainability risks, as well as reporting on their monitoring results annually.

Sustainability risk monitoring for fund managers refers to the systematic process of identifying, assessing, and managing environmental, social, and governance (ESG) risks associated with investment activities.

Identify the key sustainability risk indicators relevant to your investment portfolio and aligned with your investment strategy. These indicators may include metrics related to climate change, resource depletion, labor practices, supply chain management, governance, and other material ESG factors.

Ensure the indicators are measurable (preferably 'SMART') and aligned with industry standards and reporting frameworks.

Determine the frequency at which you will conduct sustainability risk assessments within your investment portfolio. This may be annually, quarterly, or more frequently depending on the nature of the investments and the volatility of the ESG risks involved.

Develop robust data collection processes to gather relevant ESG data for risk monitoring. This may involve engaging with investee companies to obtain disclosure on their sustainability practices, using third-party ESG data providers, accessing industry reports and databases, and conducting independent research.

Ensure data accuracy, reliability, and consistency by implementing quality assurance measures.

Perform systematic risk assessments to evaluate the material sustainability risks within your investment portfolio. Use the defined sustainability risk indicators and data collected to assess the magnitude (impact) and likelihood of the identified risks.

Integrate sustainability risk monitoring into your investment decision-making process. Consider the outcomes of risk assessments and incorporate them into risk management strategies, portfolio construction, and ongoing monitoring. Ensure that sustainability risks are given appropriate consideration alongside financial risks and opportunities.

Establish a reporting framework to communicate the results of your sustainability risk monitoring activities. Determine the format, content, and frequency of reporting that aligns with stakeholder expectations.

Include relevant information on identified risks, mitigation measures, progress, and future targets. Consider leveraging established reporting frameworks such as GRI, SASB, or TCFD to enhance consistency and comparability.

Actively engage with investee companies on sustainability issues to gather additional insights and monitor progress. Engagements may involve dialogue, meetings, and requesting additional ESG information from companies.

This interaction can help validate and enhance your risk assessments, foster transparency, and drive positive change.

Continuously review and improve your sustainability risk monitoring process. Stay informed about emerging ESG trends, regulatory changes, and industry best practices.

Regularly assess the effectiveness of your monitoring activities and adjust methodologies, data sources, or indicators as needed. Seek feedback from stakeholders to identify areas for improvement, and set a periodic date for review.

By following these steps, you can establish a systematic process to monitor sustainability risks within your investment portfolio.