EU Sustainable Finance Disclosure Regulation (SFDR)

As at the date of this disclosure, in providing discretionary portfolio management services, we work with portfolio management partners.

The Sustainable Finance Disclosure Regulation (SFDR) defines sustainability risk as “an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment.”

We recognise that sustainability risks can lead to outcomes that may have a negative impact on the value of investment returns. Therefore, we work closely with our portfolio management partners to generate ideas and recommendations for portfolio construction whilst benefiting from their securities analysis and risk management tools.

Our portfolio management partners use third party screening providers to identify companies with a poor track record in key areas of sustainability risk (e.g. environmental, social and employee matters, human rights and anti-bribery/anti-corruption). They do this because if ESG risks are not managed well by the companies and governments they invest in this could impact their profitability and therefore the investment returns for our clients. Their pre-investment analysis may sometimes identify risks which prevent them from investing in some companies or government securities. And if their ongoing risk-monitoring identifies risks then they may take a “do not make further investments” stance, reduce their existing position or, in extreme cases, they may choose to sell the investments they hold. However, ESG data provided by third parties may not always be reliable or consistent and this may impact a portfolio manager’s ability to accurately assess sustainability risks and effectively promote environmental and social characteristics, where relevant. To mitigate these operational and data quality risks associated with reliance on third party service providers and data sources, we work with our portfolio management partners to carry out due diligence where potential sustainability risks are identified so that appropriate investment decisions can be taken.

The information on this site may refer to services or products which are not available in certain locations, or which, in any relevant location, may have components and methods different from the ones described, as well as restrictions on client eligibility. Please contact a Relationship Manager for details of services and products that may be available to you.

Information on our remuneration policies and how these support the integration of ESG risks in our investment processes can be found on page 294 of the HSBC Holdings Plc 2022 Annual Report and Accounts.

Sustainable Disclosure Regulation (‘SFDR’) is a European regulation introduced to improve transparency in the market for sustainable investment products. It helps EU investors to receive accurate information on their investment choices that are in line with their sustainability goals by ensuring that marketing documents (and periodic reports) are aligned with real practices. SFDR aims to make the sustainability profile of funds more comparable and better understood by end-investors.

SFDR establishes three classifications of investment funds and discretionary mandates as laid out by following articles:

• SFDR Article 6: covers funds and mandates that do not have a sustainable objective; however, sustainability may still be part of the portfolio manager’s process, e.g. by assessing the sustainability risk
• SFDR Article 8 covers funds and mandates that promote environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices. Article 8 funds do not have sustainable investing as their core objective. These products may or may not commit to EU Taxonomy criteria and/or compliance with sustainable investments classification under SFDR
• SFDR Article 9 covers funds and mandates which have sustainable investment as their objective or a reduction in carbon emissions as their objective. An article 9 Fund must also incorporate good governance into the investment strategy

Environmental, Social and Governance (ESG) is an acronym for A set of standards used by investors to screen potential investments. It helps to consider to what extent a company plays a role as a steward of nature, manage relationships with their employees, stakeholders, and community members of the area where it operates. The ESG score is calculated to measure and demonstrate ESG performance (of a company or a product) based on verifiable reported data.

Sustainability indicators are measurable aspects of environmental or social systems that can be used to measure how the environmental or social characteristics promoted by Article 8 of SFDR article are attained. They represent quantitative information that can help to explain how measurements are changing over time. 

The ‘Do No Significant Harm’ principle sets out a rule by which Taxonomy-aligned investments should not significantly harm EU Taxonomy objectives. It was introduced to prevent investment processes which would focus on environmental or social objective without sufficient consideration for other objectives.