SFDR

ImpactNexus SFDR methodology explained

Aug 16, 2022 | Background

The ImpactNexus SFDR offering has been designed for VCs & PEs

Our SFDR offering helps investors of SMEs like Venture Capital or Private Equity firms to comply with the reporting requirements of the Sustainable Finance Disclosure Regulation (SFDR). The SFDR is an EU regulation that requires investors to be more transparent about their sustainability performance. It affects all private investors that are active in the EU. Including those investing directly in startups (Venture Capital) and SMEs (Private Equity). To learn more about the background of the SFDR, visit this article.

The SFDR disclosure requirements spread across three main domains:

  1. Publish the sustainability approach of a fund on its website
  2. Add information on a fund’s sustainability approach in pre-contractual disclosure documents
  3. Prepare annual reports of a fund’s sustainability performance (1st reports due between 1st of January & End of June 2023).

Our SFDR offering has been designed specifically to help investors (VCs & PEs) and their portfolio companies (SMEs) in the annual reporting. The SFDR requires investors to collect data from the SMEs in which they invest; however, many SMEs do not yet gather these sustainability data, they do not have dedicated sustainability experts in-house to work on the reporting and they do not have the necessary resources to hire costly experts. This makes the new regulation particularly challenging for SMEs and their investors.

Software that makes it easy for investors & portfolio companies

Having worked with SMEs on sustainability for many years, we know that the sustainability transition will be one of the main economic drivers for this century. At the same time, we know that many decision-makers in business are overwhelmed by the complexity of sustainability, with topics ranging from climate change to biodiversity or human rights and diversity. It is our mission to help decision-makers in business. We build software that makes sustainability reporting and taking action on sustainability easy.

To help with the SFDR, we designed a modular system of assessments and reporting guides that make it easier for companies and their investors to collect the data they need for SFDR reporting. To add even more value for our users, we also provide them with increasingly more insights from our impact knowledge database, helping them to identify sustainability risks faster, find relevant metrics automatically, and obtain tailor-made improvement suggestions.

Our SFDR offering minimizes the effort for investors and their portfolio companies. After creating an account, investors can right-away choose which degree of sustainability orientation their fund has (i.e. being an Article 6, 8 or 9 fund), add the required portfolio level information and invite portfolio companies with a registration link. Following the registration link, the portfolio companies set up their accounts, and then they are guided through the required modules for the SFDR reporting step by step. Using the ImpactNexus software, investors can always track the progress of the portfolio companies, review results, and generate new tasks for them. The actual SFDR reports can be generated with a few clicks and the underlying data can always be exported. Thus, investors and portfolio companies save countless hours of work on self-generated surveys, spreadsheets, and reporting slides.

Modules optimized for SMEs that allow to report & help to improve

All kinds of funds can use our solution to assess and manage the sustainability performance of their portfolios. For our SFDR offering, we focus on funds that want to comply with articles 8 or 9. Their portfolio companies obtain access to different modules depending on the sustainability approach of the fund. Due to different reporting options in the SFDR, for the practical data collection, we differentiate between article 8 (”light green”) funds, article 8+ (”medium green”) funds and article 9 (”dark green”) [see this article for more details].

Sustainable objectives [~15-30min per objective] (Available today)

To report a fund’s adherence to sustainable investment objectives, we gather data about the impacts of each portfolio company in our impact goal module. It allows companies to define impacts in line with the international best practices of the Impact Management Project and link them to international frameworks like the UN Sustainable Development Goals, the IRIS+ Impact Categories or the EU Taxonomy (launch in Q3, 2022). Moreover, companies can define quantitative impact targets and track their achievements. The reporting of sustainable objectives is only mandatory if funds pursue a sustainable investment objective for all their portfolio companies (article 9 funds) or for a share of their portfolio (article 8+ funds). But our experience shows that it is valuable for all funds and their portfolio companies to better understand and communicate their sustainability to customers, partners, employees, and investors.

SFDR benefits:

  • Assess the contribution of portfolio companies to the sustainable investment objective of a fund

Guided indicator reporting [~varies with selected indicators] (Launch of 1st version in Q3, 2022)

Funds have to collect a range of indicators from their portfolio companies. The regulation wants investors to use 14 mandatory indicators in table 1 and at least one additional environmental indicator and one social indicator from tables 2 and 3 of Annex I. These so-called principle adverse impact (PAI) indicators range from greenhouse gas emissions to hazardous waste, biodiversity, and diversity. They constitute the standard indicators the EU wants to promote. Even though the regulation strongly encourages investors to use PAI indicators, they can also choose not to use PAI indicators as long as they provide a clear explanation of why these are not suitable. In this case, they must define adequate alternative indicators to characterize the environmental and social characteristics approach of the fund. In our tool investors can select the standard PAI indicators, they can choose from other indicator collections like IRIS+ and define their own indicators. The chosen set of indicators can be assigned to all or individual companies in the portfolio and our software automatically aggregates all data on the portfolio level. Thus, investors have minimum effort in the data collection from portfolio companies. After adding some information about the fund (e.g. investment per company) we have all the required data for the reporting.

SFDR benefits:

  • Collect the required SFDR indicators from portfolio companies

ESG management assessment [~30min] (Available today)

We developed a 30-minute assessment of a company’s ESG (environmental, social, and governance) management. Having worked with hundreds of SMEs on sustainability, we saw the need to get away from lengthy and complex Excel files that overwhelm companies. There was a clear need for a user-friendly assessment that builds on international standards, regulations, and best practices, but simplifies everything to a digestible level for SMEs. So we reviewed standards from GRI or SASBI, ESG ratings like that of MSCI, discussed with institutions like KfW Capital and analyzed regulations like SFDR. The result is an ESG assessment that helps companies quickly learn about their ESG performance. On top of this, we designed the assessment in a way that allows us to benchmark companies with their peers and we can provide companies with improvement tips across all ESG dimensions. So we can make it easy for companies and their investors to identify improvement potentials and act on them. On top of this, we integrated important disclosure topics around controversial business activities, legal controversies, and adherence to international standards like the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. And finally, we embedded a “Do No Significant Harm” (DNSH) assessment for the principle adverse impact (PAI) domains of the SFDR regulation.

SFDR benefits:

  • Assess the environmental and social characteristics of portfolio companies
  • Assess Do No Significant Harm (DNSH) for portfolio companies

Adverse impact screening [~10min] (Upcoming 1st version in Q4, 2022)

Based on a few initial information about the company, and the products and services it uses, we analyze automatically which sustainability risks the company is most likely exposed to. The magic sauce is our impact knowledge database that links company information with sustainability impacts.

SFDR Benefits:

  • Show companies sustainability risks associated with business practices they might not have been aware of and need to disclose to comply with SFDR
  • Allow portfolio managers to screen for potential risks as part of their due diligence for a green investment fund and to manage the risk of existing investments

Portfolio management & reporting with a view clicks

To make portfolio management and reporting as efficient as possible for investors, they can manage the sustainability of their entire portfolio in our tool with a few clicks.

  • We provide various dashboards that allow investors to quickly identify critical issues in portfolio companies, compare performance, and track progress

Investors can use our tool to assign and track tasks for portfolio companies. Just by clicking “define task” they can select relevant tasks and assign them to all portfolio companies. Thus, they can always stay up-to-date on the progress across their entire portfolio.

Automatically generate reports & export data. We provide investors with automatic reports for individual companies as well as portfolio-level reports in line with SFDR requirements. Of course, exporting data to prepare reports on your own is also possible.

SFDR: Sustainable objectives

The impact goal module allows to define impacts, link them to the EU taxonomy, international standards & track progress

SFDR: Guided indicator reporting

The indicator module helps to collect KPIs for SFDR reporting using the official PAI indicators, standards like iris+ or self-defined metrics.

SFDR: ESG management assessment

An assessment of environmental and social characteristics that allows to benchmark,  provides improvement tips to companies and assess Do No Significant Harm (DNSH)

SFDR portfolio management: Get an easy overview of SFDR reporting status

To make portfolio management and reporting as efficient as possible for investors, they can manage the sustainability of their entire portfolio in our tool with a few clicks.

SFDR portfolio management: Benchmark the entire portfolio.

To make portfolio management and reporting as efficient as possible for investors, they can manage the sustainability of their entire portfolio in our tool with a few clicks.

SFDR portfolio management: Assign tasks to portfolio companies

Investors can use our tool to assign and track tasks for portfolio companies.

SFDR portfolio management: Automatically generate reports & export data

We provide investors with automatic reports for individual companies as well as portfolio-level reports in line with SFDR requirements. Of course, exporting data to prepare reports on your own is also possible.

Interested to learn more about our solutions?

Schedule a demo to talk to one of our representatives and learn how ImpactNexus can help your company to manage sustainability topics.