What is SFDR, EU’s sustainable finance disclosure regulation?
In our five-part series, Sustainability Frameworks 101, we’ll cover some of the most commonly used sustainability frameworks for businesses. This series is set to provide you with the fundamental information about each framework – what they are, how they are used, and why they’re important!
What is SFDR?
SFDR is the first regulation set by the EU which aims to reorientate capital flow towards sustainable finance. SFDR is inserted to provide transparency on sustainability within the financial market and thereby prevent greenwashing.
Sustainable finance is already on the up-swing worldwide. As a part of the ongoing transition towards a low-carbon, more resource-efficient and sustainable economy, the European Commission have implemented various new and updated regulations to bolster its action plan on sustainability finance. While the EU Taxonomy may be regarded as the key component of the action plan, there are a handful of other regulations that are coming your way to get familiar with. One of those is the Sustainable Finance Disclosure Regulation – also known as the SFDR for those of you who keep track of the acronyms. SFDR's main purpose is to reorientate capital towards more sustainable businesses and increase transparency on sustainability among financial institutions and market participants.
The regulation was implemented on March 10th 2021, which means it's really time to learn more about what it is, who is affected and the most important actions needed to comply in time. And we are here to help!
The SFDR was adopted by the European Commission in the spring of 2019 as a proposal for "a regulation on disclosures relating to sustainable investments and sustainability risks”. The primary goal is to increase transparency on sustainability to ensure that financial market participants (FMP) are able to finance growth in a sustainable manner. It consists of disclosure requirements on both business and product-level to standardize sustainability disclosure while combat “greenwashing” (companies giving afalse impression of their environmental impact or benefits).
In practice, the implementation on March 10 means that FMPs in the EU are obligated to disclose information on their sustainability practices (firm-level) and their financial products (product-level). In addition, FMPs need to report on their Principal Adverse Impacts (PAI) on both a firm- and a product level. The PAIs consists of a list of both mandatory and voluntary sustainability indicators, such as GHG emissions, human rights and waste management - that has to be taken into consideration in the businesses' investment policies and decisions. The purpose is to ensure that firms take a similar approach in their sustainability disclosure. After all, sustainability is a joint movement.
The SFDR regulation applies to the financial market participants (FMPs) and are defined as the “big players”, such as investment firms, pension funds, asset managers, insurance companies, banks, venture capital funds, credit institutions offering portfolio management, or financial advisors. FMPs with less than 500 employees are not obligated to comply with the SFDR. However, as the comply-or-explain principle applies, they are obligated to explain why.
While the regulation directly affects FMPs in the EU, they also have significant (in)direct impact entities outside of the EU – especially for businesses with global supply chains stretching all across the world. Since the regulation will have such an extensive impact on sustainability, many consider it to be a point-of-no-return for the financial market. It is only getting greener from here.
SFDR dates to save
There are a few SFDR key dates to put in the calendar. These are;
March 10th, 2021: The implementation date of the SFDR regulation. FMPs are required to start complying with the requirements and implement both the general principles and the specific principles of the SFDR. This is the earliest date to begin the first reference period.
June 30, 2021: Last date by which FMPs with more than 500 employees must start considering principal adverse impacts. In other words – the final date to start relevant data collection for the first reference period.
December 31, 2021: First reference period ends. The second reference period begins the day after – January 1st, 2022 – and ends December 31st the same year.
June 30, 2023: The final date which FMPs are expected to report for the second time. In addition, a year-to-year comparison between the first and second reference periods will be mandatory from this date onwards. A real game changer for businesses to start following up their progress!
How to implement the EU SFDR
So, how will it work in practice? Considering that the first SFDR requirements are approaching quickly – now is the time to act. We have listed the essential steps to get you started:
Scope: Determine what parts of the SFDR applies to your organization and products and how to align accordingly.
Get familiar with your sustainability actions and status: No matter how far you’ve come in your sustainability journey, performing gap analysis and risk assessments on up-to-date data, actions and policies will help you uncover blind spots and gaps.
Set a personalized SFDR strategy: Determine what actions are needed to be taken by your business for complete compliance with the new regulation. Create an action plan for your sustainability risk policy, due diligence policy, remuneration policy and communication strategies.
Keep your eyes open for updates and alterations: It is worth to stress that the final version of the specific disclosures have been delayed and is expected to be the latest finalized in January 2022. This indicates that the existing policies and procedures are not yet final and might be altered and updated. Keep this in mind and make sure to be up-to-date with the regulation’s development.
To sum it all up – EU is quick-paced and leaves no time to waste to turn the financial sector over to a sustainable one. This means that the market leaders today may not necessarily be leading tomorrow. Sustainable business is the future and it's time for everyone to get aboard.
You can now use Worldfavors solution to collect your SFDR data! Using Worldfavor Sustainable Investments is the fastest and easiest way to collect, calculate and aggregate all the data you need to increase your transparency and get ready to report on time.