Impacts du règlement SFDR sur l’investissement immobilier : décryptage et enjeux – Claire Meunier, responsables de programme Finance à l’Observatoire de l’Immobilier Durable.

Adopted in November 2019, the European regulation Regulation on sustainability-related disclosures in the financial services sector (SFDR) aims to promote the integration of Environmental, Social and Governance (ESG) issues by financial firms to foster truly sustainable investments and prevent greenwashing. Analysis of the implications of this regulation for financial actors investing in real estate values.

New requirements for transparency for investors and asset managers

The SFDR establishes harmonized transparency rules for actors in financial markets, based on the principle of double materiality, considering both sustainability risks and negative impacts. These obligations apply at entity and product level.

A first level of requirements has been in force since March 2021: financial actors had to disclose the classification chosen for their funds and publish on their website information relating to the entity.

The second level is gradually coming into force since January 1st, 2023. Detailed in the Regulatory Technical Standards (RTS), the rules for implementing these new obligations include the declaration of the main negative impacts, the addition of extra-financial elements in the pre-contractual and periodic information of investment products classified articles 8 and 9 and finally the expected information on the product’s website.

Classification and obligations of financial products article 6, 8 and 9

The SFDR establishes a classification system for financial products – including real estate funds – based on their consideration of ESG issues.

A “classic” financial product must comply with Article 6 of the SFDR. This must describe in the pre-contractual information for investors how sustainability risks are integrated into investment decisions, as well as the impact of these risks on the financial product’s performance, or explain why their consideration is not relevant.

A product that promotes environmental and/or social characteristics, but has not set binding targets, will apply the provisions of Article 8 of the SFDR. Information on how these environmental and social characteristics are taken into account and the methodologies used for their evaluation must be made public. A real estate fund that tracks the energy consumption of its assets, without setting targets in this area that would take precedence over financial profitability objectives, is an article 8 fund.

A product that aims for sustainable investment will apply the provisions of Article 9 of the regulation. Information on the methodologies used to measure the achievement of the objective and the monitoring indicators used, as well as indications of the means implemented to achieve it, must be made public. The performance targets set in the area of extra-financial criteria must be one of the fund’s primary objectives. The pursuit of the regulatory targets imposed alone does not appear sufficient to classify investment funds, including real estate, as article 9.

The 2023 application calendar

The application of the second level of requirements is sequenced in two periods: January and June 2023.

Since January 1st, the application concerns financial products:

• Article 6 products must publish in pre-contractual documentation the methods for taking into account the main negative impacts.
• Article 8 products must publish the RTS templates in their pre-contractual and periodic documentation, thus indicating their consideration of double materiality, their percentage of alignment with Taxonomy, how environmental and/or social characteristics are promoted, related indicators, and the impact on the investment strategy. Finally, funds must complete and publish the specific template for their website, required by Article 10 of the SFDR.
• Finally, Article 9 products must publish the RTS templates in their pre-contractual and periodic documentation, indicating their consideration of double materiality, how the sustainable investment objective is defined and achieved for the entire portfolio, related indicators, their percentage of alignment with Taxonomy and the impact on the investment strategy. Finally, funds must complete and publish the specific template for their website, required by Article 10 of the SFDR.

As of June 30th, 2023, the application will be at the entity level, and financial market actors must publish a first quantitative reporting of their main negative impacts using at least three indicators.

Although the transition to the model could ultimately offer interesting financial prospects for real estate actors while promoting a more sustainable future, the RTS still lack precision, raise many questions and entail significant human and financial needs because they are poorly adapted to the specificities of the sector.

Moreover, the lack of precision in the definition of sustainable investment appears as an additional difficulty for article 9 funds, which have recently chosen to downgrade. The European regulatory framework for responsible finance being recent and under construction, it is likely that the SFDR regulation will undergo a revision, called for by several European actors. To be continued…