What Is The SFDR?
Sustainable Finance Disclosure Regulation (SFDR) is a European regulation, introduced on March 10, 2021. The SFDR was introduced to improve transparency in the market for sustainable investment products, prevent greenwashing and increase transparency around sustainability claims made by financial market participants. Under SFDR, financial products are classified as Article 6, Article 8 or Article 9 funds based on sustainability characteristics and are subject to different disclosure requirements.
Goals of SFDR
- Improve transparency and reduce risk of greenwashing
- Provide a common language on what constitutes a sustainable investment
- Allow investors to align and monitor their investments and compare ESG products
- Ensure a level playing field for financial market participants
What are the different product categories?
There are three different product categorisations for the EU SFDR:
- “Article 6” products either integrate environmental, social and governance (ESG) risk considerations into the investment decision-making process, or explain why sustainability risk is not relevant, but do not meet the additional criteria of Article 8 or Article 9 strategies.
- “Article 8”products promote social and/or environmental characteristics, and may invest in sustainable investments, but do not have sustainable investing as a core objective.
- “Article 9” products have a sustainable investment objective.
The EU SFDR requires specific firm-level disclosures from financial institutions regarding how they address two key considerations: Sustainability Risks and Principal Adverse Impacts (PAI). With regards to financial institutions, the EU SFDR also mandates transparency of remuneration policies in relation to the integration of sustainability risks. In addition, the EU SFDR aims to help investors to choose between products by mandating increasing levels of disclosures, depending on the degree to which sustainability is a consideration.
What are the reporting deadlines?
- 10 Mar 2021 – SFDR effective
- 30 Jun 2021 – Level 1 Article 4 Disclosure
- 1 Jan 2022 – Article 11 (1-3) applies
- 30 December, 2022 Article 7 applies
- 1 January, 2023 SFDR RTS applies
- 30 June, 2023 First FMP PAI
What is your action plan?
Internal capability building
- Sustainability reporting team
- Develop data governance strategy
- Develop methodologies and propriety tools
- Allocate financial resources
Leverage resources available:
- Technology solution that can streamline the reporting
- Data vendors to fill the data gap
- Experienced consulting firms
- EU regulation legal experts