Sustainable Finance Disclosure Regulation – An overview of the new EU ESG regulation that’s coming your way

 

Download our full overview on SFDR here (pdf).

Introduction
Given the environmental and social issues the world is facing, action and increased effort from all actors – including the financial services sector – is urgently required. To make Europe’s economy more sustainable, the European Commission presented the EU Green Deal at the end of 2019. This Green Deal is the European Commission’s plan to transform climate and environmental challenges into opportunities and make the transition just and inclusive for all. Crucial in attaining this goal will be the financing of this transition.

In this light, the European Commission put forward an action plan for sustainable finance prior to launching the EU Green Deal. The aim of the action plan is to create a stable, sustainable, and transparent financial system. It seeks to establish a reorientation of capital flows towards sustainable investment, promote the inclusion of sustainability in risk management, and foster transparency and long-termism into financial and economic thinking. One of the pieces of legislation that has been created out of this action plan is the EU Taxonomy. This year, yet another highly important piece of legislation is coming into force: the EU Sustainable Finance Disclosure Regulation (SFDR).

The EU SFDR applies to financial market participants ranging from asset managers to financial advisors and will be implemented on March 10th, 2021. This piece of legislation aims to increase transparency in how sustainability risks and opportunities are integrated into the investment decisions and recommendations of financial market players. Even though this implementation date is approaching quickly, much remains unclear concerning the use of the EU SFDR. In this document, Sustainalize will provide an overview of the key dates and what exactly is required by the EU SFDR.


Key information concerning EU SFDR:

  • Who? The EU Sustainable Finance Disclosure Regulation (SFDR) applies to financial market participants (FMPs) and financial advisors. FMPs are defined as professional players in the financial market, like pension funds, asset managers, insurance companies, banks, venture capital funds, credit institutions offering portfolio management or financial advisors.
    Note: If an FMP has less than 500 employees, the ‘comply-or-explain’ principle applies. In this case, the FMP is not obliged to comply with the SFDR but must explain why.
  • When? The law will be officially implemented on March 10th, 2021.
  • What? The goal of the EU SFDR is to increase transparency on sustainability among financial institutions and market participants. It consists of disclosure requirements on firm and product levels, to standardize sustainability disclosure. This is needed to improve industry-wide comparability and prevent greenwashing.
  • Where? The regulation applies to FMPs whose business is in Europe, non-EU FMPs (and their subsidiaries) who do business in the EU or sell products to the EU, and non-EU firms that sub-manage EU assets or funds.
  • Scope of disclosure: FMPs need to report on two levels: first, disclosure is mandatory about sustainability information on a firm-level. Second, if applicable, FMPs need to disclose information on the ‘sustainable’ products they offer. For both levels, there are general and specific disclosure requirements. The specific disclosure requirements are further elaborated on in the ‘ (RTS). The purpose of the RTS is to provide further detail and guidance to ensure that firms take a harmonized approach in their methods of collecting and disclosing information. This is needed to meet the objective of the EU SFDR.

EU SFDR at a glance
Below, an overview is given of the different levels and topics of disclosure of the SFDR. First, FMPs need to disclose information on a firm-level about their sustainability policies. Second, FMPs will need to disclose information on a product-level about their financial products. On both a firm- and a product-level, FMPs need to report on their Principal Adverse Impacts (PAI). PAI consists of a list of sustainability factors (e.g., GHG emissions, waste, biodiversity, human rights) that firms need to start taking into consideration in their investment policies and decisions. It consists of mandatory and voluntary indicators, both related to environmental and social topics. Some of the PAI indicators are not yet finalized. This will part of the Regulatory

 

Technical Standard (RTS), whose purpose is to provide further detail and guidance to ensure that firms take a similar approach in their sustainability disclosure.

Overview SFDR

 

Timing
The initial plan was to implement both the general principles and the specific principles of the SFDR on March 10th, 2021. However, the final version of the specific disclosures (the so-called Regulatory Technical Standards or RTS), is delayed and expected to be finalized no sooner than January 2022. . This does not affect the implementation date of the EU SFDR.

FMPs must disclose the appropriate information from the date they start considering the principle adverse impact (PAI) of their investments. FMPs can start taking this into consideration between March 10th and June 30th, 2021. After this year, FMPs are expected to report the mandatory information from January 1st – December 31st, each year.

SFDR timeline

What’s next?
The first SFDR requirements are approaching quickly. Now is the time to act. Not only if you offer ‘sustainable’ products or already include sustainability in your services, but also if you are not doing anything with sustainability yet. Here are the steps to take to work towards EU SFDR compliance:

Scoping: Determine what parts of ESG disclosure regime apply to your firms or products.
Gap analysis: Assess which actions are needed to comply with the new regulations. Perform analyses on data, processes, and policies to identify gaps and blind spots.
Implementation plan: Determine the steps that need to be taken to comply with the SFDR by making an action plan for: sustainability risk policy, due diligence policy, remuneration policy, sustainability communications
Categorization: Categorize the products that promote ESG characteristics and have sustainability as an objective (in line with EU Taxonomy) and including the needed ESG-information.
Updating and amending: Many of the existing policies and procedures will have to be amended and/or updated. We will be your partner to keep up to date with the latest developments.

Could you use some help on this new EU ESG regulation? Let us support you on this journey. Don’t hesitate to contact our colleagues Nick or Marleen if you have any questions on the topic.

Download SFDR overview