As 'out of office' messages come to an end and GRESB brings ESG and all that it entails back to the fore, we thought it was a good time to start talking about Sustainable Finance Disclosure Regulation (SFDR) again.
Did you meet your SFDR reporting requirements this summer? By June 30th, financial market participants were supposed to make "best effort disclosure" in their annual reporting. From what we've heard in real estate circles, many managers didn't actually meet the requirements this year. Luckily, the first mandatory deadline isn't until January 2023, but it means that now is the time to get your data collection and reporting plan in place.
First, let's cover the basics of SFDR:
WHAT: SFDR is European regulation which was introduced as part of the EU Sustainable Finance package to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants (FMPs) and financial advisors (FAs). It aims to make it easier for investors to understand the sustainability investment strategies of asset managers and investment advisors as part of the EU's push toward making the economy greener.
The regulation imposes comprehensive sustainability disclosure requirements covering a broad range of environmental, social and governance (ESG) metrics at both entity and product level. Investment products must be designated as Article 6, 8 or 9 funds and make certain disclosures in keeping with this choice. Article 8 funds promote environmental and social characteristics while Article 9 funds have sustainable investment as their objective. These funds will also need to disclose information about the proportion of their alignment with EU Taxonomy.
At the entity level, FMPs must disclose principal adverse impacts of investment decisions on sustainability factors – including detailed indicators for environmental and social impacts accompanied with textual explanations and commentaries using a mandatory reporting template. These Principal Adverse Sustainability Impacts Statements include 18 mandatory indicators and 46 optional indicators. FMPs must include descriptions of policies to assess and actions to address principal adverse sustainability impacts, engagement policies, references to international standards, and a historical comparison from the second reference period onwards.
WHO: Financial market participants and financial advisors in the EU, FMPs with EU shareholders, and those marketing themselves in the EU
LOCATION: European Union
WHEN: The SFDR RTS (regulatory technical standards) will apply from January 1, 2023, although FMPs should have made best effort disclosures in their 2022 annual reporting.
Some important dates:
- January 1, 2023 - Pre-contractual disclosures for products promoting environmental or social characteristics
- June 30, 2023 - Final date to report for the first time over reference year 2022 on PAIs of investment decisions
- June 30, 2024 - Final date to report for the second time over reference year 2023 on PAIs of investment decisions
- Entity level - on the FMP/FA website
- Product level - on the website, pre-contractual statements, and periodic product disclosures
Anyone who has started to dive into the details knows it isn’t as simple as who, what, when, and where. Understanding and untangling the requirements for SFDR seems to require a law degree, professional career in real estate, deep experience with ESG, and a knack for data and statistics.
But we’ve got you covered!
Follow along on the blog as we tackle some of the more complex areas of SFDR with our law-real-estate-ESG-data-science experts. And get in touch to learn how Scaler can help you meet your disclosure requirements.