SFDR requires “financial market participants” to publish information on the extent to which they take into account sustainability risks and adverse sustainability impacts in their investment decision-making and remuneration policies.

SFDR also requires certain disclosures in respect of “financial products” that promote environmental and social characteristics. Local Irish regulations have been introduced to clarify how SFDR applies to “financial market participants” and “financial products” which are Irish occupational pension schemes, leading to some challenges in interpreting the applicable disclosure requirements.  This update summarises the SFDR disclosure requirements for trustees of funded occupational pension schemes.  There are other pensions related obligations under the SFDR – for example, a personal retirement savings account (“PRSA”) is also a “financial product” and a “pension product” – those other obligations are not addressed in this update.

European Union (Sustainability – Related Disclosures in the Financial Services Sector) (Occupational Pension Schemes) Regulations 2023 (the “SRD Regulations”)

On 7 March 2023, the Minister for Social Protection published the local Irish SRD Regulations. The SRD Regulations amend the Pensions Act, 1990 to confirm the application of specified articles of the SFDR to occupational pension schemes. The SRD Regulations also give the Pensions Authority (the “Authority”) express powers to (i) monitor compliance by the trustees of schemes with the specified parts of the SFDR; and (ii) request trustees to provide such information as the Authority may require in relation to compliance with same.

The effect of the SRD Regulations is to require statements about sustainable investment and environmental, social and governance (“ESG”) characteristics including where such aspects are either not primary considerations or are not direct (or indirect) considerations in the trustees’ investment decisions.  A negative disclosure is still required in some instances.  Accordingly, all trustees irrespective of their sustainability/ESG perspective will need to review:

• the scheme statement of investment policy and principles (“SIPP”) and statement of investment governance (“SIG”);
• the investment disclosures in the Trustee Annual Report and Accounts;
• the member booklet and any member investment guide;
• applicable remuneration policies;
• website disclosures; and
• any other applicable member communication materials (e.g. defined contribution (“DC”) investment choice forms).

The disclosure requirements cover matters such as: the extent to which  “sustainability risks” are integrated into investment decision-making processes and if not the reasons why not; and the transparency of “adverse sustainability impacts at financial product level” (Article 7 of SFDR).

In order to assist with their own SFDR compliance, investment managers are asking trustees of occupational pension schemes to certify the nature of their pension scheme as regards ESG investment. It appears that the classifications outlined in that certification process are based simply on the SFDR template disclosure and as such are not entirely on all fours with the nature of an occupational pension scheme that is taking into account ESG factors as one of the many factors in making investment decisions but which is not itself an Article 8 or Article 9 product for the purposes of SFDR. We recommend that if presented with such forms, trustees take appropriate legal and investment advice in relation to them.

SFDR Level 2 Requirements

SFDR applied from 10 March 2021 and financial market participants were required to comply with a number of high-level principles-based disclosure requirements by that date. These were known as the SFDR Level 1 requirements and are supplemented by more detailed Level 2 requirements which must be complied with from 1 January 2023. The practical steps required to comply with the SFDR Level 2 requirements for financial market participants which are promoting sustainable investments (“Article 9” financial products) and/or promoting environmental or social characteristics with underlying good governance practices (“Article 8” financial products) are set out in the Regulatory Technical Standards (“RTS”) published by the European Commission in April 2022.

The RTS sets out template disclosure statements applicable to financial market participants which consider adverse sustainability impacts when making investment decisions or which are promoting Article 8 and Article 9 financial products.  Much of these technical template disclosures will not be applicable to the majority of pension scheme trustees.  To the extent that such considerations are being addressed at the investment manager level the RTS will apply to the scheme’s underlying investment managers.

Where a scheme does not complete an adverse sustainability impact statement, they must instead publish a statement on their website stating that they do not consider the adverse impacts of their investment decisions on sustainability factors.  Similarly, it will be important to be clear in disclosures to members the extent to which, if any, the scheme constitutes or promotes an Article 8 or 9 financial product for the purposes of the SFDR.  The combination of the SFDR and the local Irish regulations require disclosures to be made in “pre-contractual disclosures” (which in a pension context generally means the member’s booklet, investment guides, SIPP/SIG, website and other relevant member communications) and in “periodic reports” (which generally means the Trustee Report and Accounts but may include other communications).

Please contact us if we can assist in drafting or reviewing SFDR compliant disclosures or help in providing any further advice on the applicability of SFDR requirements and/or the steps required to address them.