The Sustainable Finance Disclosure Regulation (SFDR)

SFDR imposes disclosure requirements for financial market participants.

21:27 26 August 2023

SFDR imposes disclosure requirements for financial market participants. It requires them to disclose information on their sustainability related products. These disclosures include the pre-contractual and periodic disclosures.

These disclosures include entity and product-level disclosures on the integration of sustainability risks and sustainable investment objectives. Managers must also publish a statement on their due diligence policies on principal adverse impacts (PAI) at the entity level.

SFDR - what is it?

The SFDR (as the acronym goes) is a European regulation that applies to financial market participants and financial advisers. It sets transparency requirements on both business and product level to standardize sustainability disclosures while combating greenwashing.

The regulation defines core and enhanced disclosure requirements, including mandatory PAI indicators at entity-level and a statement on policies about consideration of PAIs in investment decisions at the manager level. It also requires pre-contractual and periodic disclosures on the integration of sustainability risks.

The SFDR also imposes specific reporting templates and granular data points to enable investors to identify any environmentally sustainable fossil gas or nuclear activities in their investments. This explains the additional nuances that separate it from the NFRD and CSRD. To know more information about SFDR Click here.

SFDR's core Objective

The core objective of the SFDR is to increase openness about ESG issues in financial markets and to establish standards for reporting and disclosing information on sustainability. This will help to integrate sustainability considerations into the financial system and steer the flow of capital towards sustainable investments.

Article 6 of the SFDR requires FMPs and FAs to disclose the policies they have in place for due diligence over principal adverse impacts on sustainability factors. This includes disclosure of Scope 1-3 emissions and the policies in place for company engagement.

The SFDR also requires a “comply or explain” approach with respect to disclosures on principal adverse impacts, and the compliance with EU Taxonomy Regulation. In addition, Article 9 of the SFDR covers pre-contractual disclosures for products with a sustainable investment objective.

A SFDR differs from a NFRD or a CSRD

The SFDR requires financial market participants to disclose information about their sustainability impacts. This disclosure is required at both the entity and product level. The information disclosed includes how the impact of a product was taken into consideration and how it compares to other products. This information is intended to prevent greenwashing, and it will also help investors decide which products are appropriate for them.

Unlike the NFRD, which applies to companies of all kinds, the SFDR only applies to financial market participants. It has a high level of disclosure requirements, and it includes a “comply or explain” provision for non-compliance. The SFDR is a big step forward in EU sustainable finance, and it will make it more difficult for companies to make false claims about their sustainability measures.

The SFDR's Pros and Cons

The SFDR is expected to transform sustainability disclosure across the financial industry. It will require new processes and procedures for EU market participants, while catalyzing strategic choices about how to approach sustainable investment.

It applies to a wide range of financial market players, including investment firms, pension funds, asset managers and life insurance companies. It also applies to non-EU fund managers and advisors that promote their products to investors in the EU.

Under the SFDR, scoped entities are required to disclose both at entity level and product level how they integrate sustainability risks and impacts into their decision-making. If they do not, they must explain why not. The SFDR allows funds and entities to be classed according to their depth of consideration of sustainability factors, which is a positive step.

In the EU, SFDR Improve Sustainability

The SFDR is the EU’s latest addition to its toolkit to push capital towards sustainable investments. It requires entities to disclose how they integrate sustainability considerations into their investment decision-making process. The regulation also establishes a framework to compare and monitor sustainability-related information. Its key feature is the concept of principal adverse impacts, or PAIs.

The regulation applies to financial market participants that manufacture or sell financial products and offer portfolio management services within the EU, as well as financial advisers. It also applies to funds outside the EU that are marketed in Europe.

The SFDR requires disclosures at the entity and product level. Entity-level disclosures include a statement on policies about how the entity considers PAIs. Product-level disclosures include a declaration on how the fund takes PAIs into account.

Greenly - what is it?

Greenly is a carbon accounting software that makes it easy to calculate the impact of business activities on climate change. This is useful for businesses that want to reduce their greenhouse gas emissions. It works by analyzing the qfinancial data of a business to determine its emissions footprint and make suggestions for reducing those emissions. It can be used for both small and large companies.

Founded in 2019 by Alexis Normand, Matthieu Vegreville, and Arnaud Delubac, Greenly is a startup based in Paris, France. The company has received significant funding from investors such as French Tech Green 20 and Xange. Greenly’s mission is to simplify carbon accounting and to help everyone track their emissions, so they can take action to fight climate change.

The software can be integrated with over 100 enterprise software solutions to automatically collect and analyze data from a company’s accounting or billing system, travel, cloud data, electricity vendors, and other sources. This allows the software to calculate a business’s scope three emissions and create an emission reduction report that meets international standards like the GHG Protocol. The software can also be customized to fit the specific needs of a business or industry, such as including or eliminating data points that are not relevant to an organization’s climate goals.

Business's Go-To Carbon Accounting Platform

The best carbon accounting software streamlines the complicated process of tracking and analyzing greenhouse gas emissions. As more investors and stakeholders require sustainability reporting, the right tools can help you set targets, monitor progress, and measure the impact of your efforts to reduce carbon emissions.

However, the market is flooded with software options, which range in features and price, so you’ll want to consider your particular requirements before selecting the right carbon accounting tool for your business. You’ll also need to evaluate your budget and internal capacity to support the project. Look for software that offers a free assessment, which can save you time and money in the long run.

Ensure that the solution offers seamless integrations with your other accounting and sustainability management tools, which will reduce manual data entry and errors. Look for an intuitive interface that simplifies tracking and analysis, freeing your team from the burden of lengthy trainings. Choose a solution that supports your preferred reporting frameworks and industry standards, such as GRI, CDP, SASB, TCFD, and more.