Increasingly, investors, regulators, stakeholders and the public are holding companies accountable for sustainable practices. Recent legislation also highlights the relevance of corporate sustainability developments.
The Sustainable Finance Disclosure Regulation (SFDR) is one of the European Union’s legislative instruments to make Europe’s economy more sustainable. It prescribes comprehensive sustainability disclosure requirements covering a wide range of environmental, social and governance (ESG) criteria at both company and product level.
Why was the regulation introduced?
The Sustainable Finance Disclosure Regulation is part of the EU Action Plan on Financing Sustainable Growth, which was originally adopted in 2018 and has the overarching goal of linking finance to sustainability. The regulation was introduced to improve transparency in the market for sustainable investment products, increase the transparency of sustainability claims made by financial market participants and thus prevent greenwashing.
Who does the SFDR apply to?
The EU regulation applies to financial market participants and financial advisors. This means companies that develop and offer financial products such as banks, insurers, asset managers and investment firms. The information to be reported under the Sustainable Finance Disclosure Regulation is often supplementary to existing disclosure obligations of financial undertakings on their products. It applies mainly to financial institutions operating in the EU. Non-EU companies will be indirectly affected through EU subsidiaries, the provision of services in the EU and market pressures.
As of when does the SFDR apply?
The Sustainable Finance Disclosure Regulation gradually came into force from March 2021. Following the introduction of SFDR Level 1, the Regulatory Technical Standards (RTS) for SFDR Level 2 were published and are mandatory from January 2023. SFDR Level 2 is currently being developed.
What has to be reported?
Various content requirements apply at the company and product level. They mainly concern the description of so-called significant adverse sustainability impacts at the company and product level and how these are incorporated into decision-making processes. In the case of ESG financial products, a distinction can be made between Article 8 financial products, which advertise environmental or social characteristics, and Article 9 financial products, which explicitly aim at sustainable investment. For both, the ESG characteristics must be described in more detail. For example, it must be explained how these ESG characteristics are fulfilled, assessed, and monitored.
How does the SFDR relate to the EU taxonomy and the CSRD?
EU Taxonomy, CSRD and SFDR are part of a larger EU Sustainable Finance Framework that embeds sustainability factors at various levels of the economy.