Sustainable Finance Regulation (2024)

FAQs

Sustainable Finance Regulation? ›

SFDR. The Sustainable Finance Disclosure Regulation (SFDR) introduces disclosure standards for financial market participants, advisors and products. The aim of the regulation is to minimise greenwashing and to provide a transparent view into sustainability investments for the end investor.

The EU Sustainable Finance Disclosure Regulation (SFDR) is a set of EU rules which aim to make the sustainability profile of funds more comparable and better understood by end-investors.

The main purpose of the SFDR framework is to enable investors and consumers to make more informed investment decisions contributing to the sustainable transition, by setting disclosure requirements covering a broad range of environmental, social & governance (ESG) metrics at both entity- and product-level.

While both ESG and sustainability are concerned with environmental, social, and governance factors, ESG focuses on evaluating the performance of companies based on these factors, while sustainability is a broader principle that encompasses responsible and ethical business practices in a holistic manner.

The primary goals are to provide greater transparency on environmental and social characteristics, and sustainability within the financial markets, and to create common standards for reporting and disclosing information related to these considerations.

The SFDR requires asset managers such as AIFMs and UCITS managers to provide prescript and standardised disclosures on how ESG factors are integrated at both an entity and product level. A significant portion of the SFDR applies to all asset managers, whether or not they have an express ESG or sustainability focus.

To whom does the SFDR apply? In principle, the SFDR applies to all financial market participants, including banks, investment firms, pension funds, asset managers (including managers falling under the AIFMD registration regime) and life insurers (insofar as they offer insurance-related investment products).

Every financial market participant or financial advisor based in the EU must comply with SFDR reporting, across asset classes and including private equity.

Pillar 1: Definition: Use of proceeds. Pillar 2: Selection: Process for project evaluation. Pillar 3: Traceability: Management of proceeds. Pillar 4: Transparency: Monitoring and reporting.

Sustainable finance is an overarching term referring to the investment process accounting for and promoting environmental and social factors, as illustrated in the image above. While covering a broad swath of activities, we will focus on a subset of sustainable development: environmental or green finance.

What is replacing ESG? ›

'ESG' originated as a way to demonstrate compliance however it was often then used interchangeably, and use of the term was replaced with 'sustainability'. But it's making a resurgence – 'ESG' is back.

These criteria include analysis of the impacts of business activities in terms of carbon emissions, biodiversity protection, waste management, etc.; societal impacts; and the set of rules that govern the way companies are controlled and managed.

SFDR relies on self-assessment and self-reporting by financial firms. This may not always be reliable, either because of data quality or internal resource capacity. Some firms may be inclined to exaggerate or misrepresent their sustainability practices to attract investors or comply with the regulation.

Who Needs to Follow The SFDR? The SFDR's broad scope applies to all financial advisers (FAs) and financial market participants (FMPs) based in the EU. The SFDR defines FAs as entities that provide investment or insurance advice. FAs with fewer than three employees are not required to provide information.

SFDR came into force on 10 March 2021. It applies to all financial products (open-ended and dedicated) distributed in the EU and to all financial market participants (insurance companies, investment firms, pension funds and fund managers) and financial and investment advisors).

The Regulation aims to improve transparency in the market for sustainable investment products and to prevent greenwashing of financial products or financial advice.

“Sustainable investment” means an investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its ...

The indicators cover a broad range of issues, such as greenhouse gas emissions, water consumption, waste production, and impacts on biodiversity, as well as social and employee matters, human rights, and anti-corruption practices.

According to the SFDR's classification system, a fund will either be classified as an article 6,8 or 9 fund – depending on their characteristics and level of sustainability: Article 6: Funds without a sustainability scope. Article 8: Funds that promote environmental or social characteristics (light green)