AFG Recommendation – Definition of sustainable investment according to SFDR

The AFG has published a recommendation containing proposed common principles to clarify the definition of sustainable investment according to the SFDR level 2 measures, which apply from 1 January 2023.
The SFDR has a very general definition of sustainable investment, which has led to heterogeneous results from one player to another. The AFG recommends considering an investee company sustainable as a whole when it is identified as active or committed. Active companies align with the taxonomy or contribute to the issues listed in the SFDR regulation, using a commonly accepted framework, such as the UN’s SDGs. Committed companies have a measurable and enforceable commitment, such as a company’s commitment to transition measured by its current or projected investments and with monitoring and escalation processes monitored by the asset management company.
The AFG recommends that the following elements be considered when defining a company’s contribution to an environmental or social objective: the share of turnover Capex and/or OpEx contributing to an environmental or social objective, a company’s commitment to the transition, and any other quantitative element allowing the assessment of the company’s contribution to an environmental or social objective. In addition to this contribution, the do not significant harm principle (through the SFDR PAI) should also be respected, and companies in which the investments are made have to follow good governance practices.
The AFG recommends asset management companies to provide transparency on their methodologies and in notably on the threshold above which a company is considered as sustainable entirely. The AFG’s principles could provide some help to apply the definition and be used as a convergence tool. The AFG continues to work on the subject and to exchange with other stakeholders who have also started work. Clarifications may come from the authorities, and AFG will modify or enrich its recommendations accordingly. These principles are being promoted by AFG in a context where other stakeholders are also working on the issue.