SFDR: requiring the EU financial sector to report sustainability impact

Sustainability

25. Feb 2022

Aron Vallinder, PhD

Research Writer

The SFDR requires EU financial actors to report their sustainability impact beginning January 1st, 2022. Here’s what that means & how to comply.

Aron Vallinder, PhD

Research Writer

The Sustainable Finance Disclosure Regulation (SFDR) is a piece of EU legislation that aims to increase the transparency of sustainability matters among financial actors.

It’s part of a broader legislative effort by the EU to move toward sustainable growth and reach net zero emissions by 2050, in line with the Paris Agreement. 

Additionally, the SFDR ensures that financial actors report on sustainability issues in a standardized manner, and combats greenwashing by imposing more stringent requirements on which financial products may be called sustainable or climate-friendly.

Who has to comply with SFDR?

The SFDR applies to financial market participants and financial advisors within the EU. This includes asset managers, institutional investors, insurance companies, and pension funds, among others.

Financial market participants with fewer than 500 employees are not required to produce a principal adverse impact statement (explained below). However, if they do not comply, they are required to explain why.

The SFDR applies in full if your business meets the following categories:

  • Financial market participant or financial advisor
  • Based in the EU
  • 500+ employees

How to take action on SFDR

If your company or firm falls under the SFDR’s jurisdiction, you’ll have to meet certain disclosure requirements.

These disclosure requirements are at both the entity level and at the product level.

Entity-level disclosures

The SFDR requires financial market participants and financial advisors to disclose the following information on their websites:

  • Sustainability risk policy – A statement on how sustainability risks are taken into account in their investment decisions.
  • Principal adverse impact – A description of how their investments affect a range of sustainability factors.
  • Sustainability risk remuneration policy – A statement on how sustainability risks are taken into account in their remuneration policy.

If a financial market participant does not consider the sustainability impact of its investment decisions, they must publish a prominent statement to this effect on their website and provide clear reason for why they do not take sustainability impact into account.  

When it comes to entity-level principal adverse impacts, the SFDR requires companies to report on 14 different sustainability factors, including both climate-related indicators and social matters. Of these 14 factors, six are concerned with GHG emissions.

Most importantly, companies must report on the emissions volumes of investee companies. This includes not just Scope 1 and 2 emissions, but – from January 1st, 2023 – Scope 3 emissions, as well. 

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Product-level disclosures

The SFDR requires financial market participants and financial advisors to disclose the sustainability profile of financial products they produce or promote. They must categorize financial products as:

  1. Mainstream.

  2. Having sustainable investment objectives.

  3. Promoting environmental or social characteristics.

As with the entity level disclosures, firms are required to disclose how sustainability risk was taken into account and what the principal adverse impacts are. If they do not disclose this, they must explain why. 

If a financial product is categorized as promoting environmental or social characteristics, it must be made clear which particular characteristics, and which sustainability indicators are used to measure whether they are attained. Similarly, if a financial product has a sustainable investment objective, it must be made clear what sustainability indicators are used. 

When do you have to comply with SFDR by?

SFDR was implemented on March 10th, 2021.

Reporting began January 1st, 2022

From January 1st, 2022, companies covered by SFDR need to begin reporting their Principal Adverse Impact.

The SFDR’s regulatory technical standard will come into effect on January 1st, 2023.

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