2023 SFDR & ESG disclosure methodologies: Managers, take your pick

November 17, 2022

By Sanyu Kyeyune, NAREIM Head of Programming


Sustainability virtual meeting key takeaways


The NAREIM Sustainability virtual meeting focused on SFDR and other key ESG regulations, ahead of 2023’s level 2 SFDR disclosure requirements.


Led by Morgan Stanley Real Estate Investing and Linklaters, the discussion started with a snapshot of the global ESG landscape, and showed that U.S. rules align most closely with the U.K., as opposed to Europe.


ESG themes & regimes

Three key themes emerged:

· Identify and manage ESG risk

· Improve ESG disclosures to encourage firm accountability and direct investment in green products and firms

· Combatting greenwashing


As well as three key regimes, their underlying rules and the choices they offer:


· US SEC: impact and ESG

· EU SFDR: articles 6, 8, 8+ and 9 categorizing financial products

· UK SDR: sustainable focus, impact, and improvers


While SFDR offers more choice to managers, the EU taxonomy defines the economic activites and business lines that constitute a sustainable focus.


US SEC rules apply to mutual funds promoting impact, integration and ESG-focused strategies, each mandating varying disclosures. For any fund promoting these characteristics, at least 80 percent of assets in portfolio must adhere to the strategy.


Moving U.S. ODCE funds to Article 8 disclosures—how soon is too soon?

Communicating net zero targets might fall beyond traditional risk management, indicating a fund is promoting environmental characteristics, triggering additional disclosures. One manager opined that U.S. fund managers are taking a wait-and-see approach as compared to their counterparts in targeting Article 8 disclosures.


Within Article 8, managers can choose which environmental characteristics they want to promote. These may include net zero targets of varying scope, time horizon and energy reduction target; GRESB scores; health and wellbeing; percentage of a fund with green building certifications; tenant engagement. It’s up to the manager to explain to investors how each characteristics will improve fund performance.


ESG targets as risk management

How are managers defining these commitments? A few managers are seeking limited assurance, third-party validation of their strategies and targets—and how these are being tied to investment returns. Industry best practice guidance like CRREM or BREEAM can help. However, as one manager cautioned, CRREM is not sufficiently adapted to the U.S. and Canada, and consultants in the U.S. should not rely on it. In 2023, ULI plans to launch a North American working group to progress the tool. 


Another manager mentioned a more conservative approach to ESG, disclosing Article 6 rather than 8, in light of market dislocation, and to combat “greenbleaching” risk.


Looking ahead to 2023, where should managers focus? The detail and specificity of the fund strategy is key to mapping the various global ESG fund classifications. A one-page matrix table in the investment disclosures appendix was one proposed solution.


You can view the presentation from the virtual meeting at this link.