5 steps to succeed with your SFDR reporting

Since it was first proposed in 2019, there have been many questions regarding how to report on the EU's Sustainable Financial Disclosure Regulation (SFDR). However, as it becomes mandatory when it enters its Level 2 phase on January 1st, 2023, it is high time for Financial Market Participants (FMPs) to understand exactly what and how they need to report.

If you're still unsure how to proceed with your SFDR reporting – this blog is for you. In our latest webinar, "How to implement an SFDR reporting process – The benefits of working with a digital tool," Worldfavor’s own Financial Markets Lead, Terése Hammarsten, and Head of Sustainability Data, Johan Löfqvist, provided step-by-step guidance on how to implement an SFDR reporting process – and this blog outlines the key takeaways from their conversation.

Let’s get started!

1. Access the data you need from your portfolio companies

Data accessibility refers to the means by which you are able to access investment data, i.e. how you can retrieve the vital information needed for your reporting. There are two ways to access data:

Indirect approach: accessing information from a third-party provider
Direct approach: directly collecting information from portfolio companies

Naturally, collecting information directly from your portfolio companies is preferable. That way, you know exactly where the data came from, when it was gathered, and whether or not it is still relevant. Unfortunately, that just isn’t always feasible, in which case, accessing information from a third-party provider – the indirect approach – is usually considered the next best option.

The SFDR's regulatory technical standard (RTS) talks about how the organization must use a "best efforts approach" when collecting its data. This means that the organization must make its best effort to obtain the information "either directly from investee companies or by carrying out additional research, cooperating with third-party data providers or external experts or making reasonable assumptions.” (RTS, Annex 1).

Lastly, if your “best effort” choice prevents you from choosing only one method – if necessary, you can also take a hybrid approach to complete your SFDR reporting.

2. Engage with your portfolio companies to access the data needed for SFDR reporting

It's crucial for FMPs to engage with their portfolio companies and make sure that they understand the value of their reporting efforts. The reason? Simply put: the SFDR regulation is directed to investors, not their portfolio companies, so their efforts are directly proportional to your compliance. Depending on the type of investment, the number of investments, and the maturity of the investee companies, accessing the required indicators might be hard. Companies might not yet be measuring these KPIs or have them readily available.

4 steps to make engaging with portfolio companies as smooth as butter:

Anchoring the “why” and “what:” Start by considering the “why” of your SFDR reporting. Are you doing this for the single purpose of reporting, or do you see it as an opportunity to drive change, improvements, and growth within your investments? Thinking about the “what” (meaning: what exactly do I need to report on?) then becomes the next natural step.
Take ownership of the reporting process: The SFDR reporting process needs to be established within the affected organization. This requires FMPs to take ownership and leadership around it, for example making sure their investments know of the actual purpose behind SFDR – since reporting isn’t mandatory for them.
Get a grip on your investment's SFDR maturity level: Think about the maturity level within your investments. This regulation covers all types of FMPs. Therefore, there is a huge difference in maturity level among portfolio companies, and some KPIs can be challenging for them to understand. Make sure that your portfolio companies have the tools and resources needed to easily report their data to you – especially your least mature companies.

Figure out what resources you will need: Lastly, reporting requires resources such as time and effort to increase knowledge internally, as well as amongst portfolio companies, etc. You should ask yourself: to what extent do you need to plan resources? And how are they dependent on the “why” and “what?”

3. Understand how to manage and follow up on your SFDR data

Understanding how data is managed and its purpose is really fundamental to succeeding with your reporting. As Johan Löfqvist said during the webinar, “data that is loved tends to support impact.” With that in mind, FMPs beginning to work with non-financial big data should remember a few key things:

Data can be time-consuming: Without the right tools, working with data can be time-consuming. This more or less depends on how structured you are, but either way, it helps to have a plan in place.
Data quality matters: When it comes to data quality for portfolio companies, the incoming data is the most important variable. Poor quality incoming data leads to poor quality reporting. Because of this, be sure your investments deliver data of high quality, as this will improve the quality of your reporting.
Value-driven reporting can be beneficial: If possible, make your reporting value-driven. Instead of seeing this as a reporting process, see this as an opportunity to align on the “why” amongst your investments. Establishing this common ground can increase the quality of their overall work and reporting. Give them the tools and means to be able to provide good information.
Establishing a clear system is key: Aggregations and calculations are important to keep data structured over time, but instead of setting them up yourself, find a trustworthy platform or service to speed up the process.
Be adaptive to changes within the regulation: Next year is the first year that you have to report on SFDR. There may be updates on how and what you are required to report. Therefore, it is important to stay informed and be adaptive to these changes.

Want to receive more in-depth knowledge about how to set up a smooth and stress-free SFDR reporting process? Download our SFDR guide: How to collect, manage and report your SFDR data."

4. Start your SFDR reporting process in time

Of course, there might always be a discrepancy between the regulation and its reality. SFDR is a European regulation. It may not be specifically adapted to who you are, since its goal is to affect a wide spectrum of stakeholders. Therefore, you need to understand how SFDR will be implemented for you, depending on what type of investor you are and what kind of portfolio companies you have.

For that reason, starting your SFDR reporting process in time is vital. The perfect moment may be difficult to pinpoint, but you can never start too early with your SFDR reporting – and too late is always too late. Ideally, you should engage with your portfolio companies and inform them on what is about to happen already this year. Waiting until late Q4 or Q1 will affect the process and quality of your SFDR reporting since the regulation isn’t necessarily a key priority for portfolio companies (and they are often busy around that period).

Lastly, you should remember that this is a learning process for us all. Now is the first time investors need to report on SFDR, and therefore no sanction regimes have been put in place yet. No one will be an expert right away, and clarifications will come down the road.

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5. Digitalize your process: Harness the benefits of working with a digital tool

Simplify your SFDR reporting process by working with a digital tool – like Worldfavor. Worldfavor can provide you as an investor with the following:

Ready-to-use data sets for active ownership including Principle Adverse Impact (PAI) indicators: Worldfavor updates you as the regulation changes and provides you with standardized content related to the PAI indicators you need to collect.

Digitalized data collection with automated aggregations and calculations: This helps companies to capture the data that they need over time to report and calculate carbon footprints.

Visualized insights and trends for proactive tracking and ready-to-report: Leaving you with plenty of freed-up time.

Inspire and guide portfolio progress with a value-add reporting account: Take leadership to drive change and build transparency.

When using the Worldfavor platform, you can start by addressing what kind of data you want to collect from which company (for example, ESG KPIs, PAI indicators, EU taxonomy, Impact KPIs, etc.). The platform then digitally collects, aggregates, and calculates that data, delivering a visualization of exactly what you need to report on. With the help of a digital tool, the complexity of certain metrics (such as scope 3 and taxonomy alignment) may be minimized.

Want to learn more about how Worldfavor Sustainable Investments can be used for complying with SFDR? Download our whitepaper: “Align and report on the SFDR with Worldfavor,”