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Net Zero for Finance: How Disclosure will be under SFDR

FMPs and FAs in the EU are now required to make relevant disclosures if their products promote sustainable characteristics under the SFDR. How should they respond and how far will the EU go in pursuing sustainable finance?

MioTech Research2021-04-01
#SustainableFinance#EU#SFDR

The Sustainable Finance Disclosure Regulation is part of the European Commission’s commitment to promote sustainability in financial products by providing greater transparency and prevent “greenwashing”, the use of false or misleading information about the effects of such products on the environment. The regulation, which comprises 60 indicators defined by the EC regulator, will be phased in from 10 March 2021. The SFDR requires all financial market participants (FMP) in the EU to disclose ESG issues, with additional requirements for products that promote ESG characteristics or that have sustainable investment objectives.

First proposed in May 2018, the SFDR is an essential component of the EC Action Plan, and is complementary to the EU Taxonomy, the classification tool of economic activities.. It aims to provide end investors with more protection from information asymmetries relevant to sustainability risks and to move capital to more sustainable businesses via increased transparency regarding the integration of sustainability risks and the negative impacts of sustainability issues and the disclosure of such information.

The SFDR applies to FMPs and financial advisors (FAs) in the EU. Non-EU entities with EU-based subsidiaries and/or provision of services in the EU are also subject to the regulation.

As required by the SFDR, FMPs and FAs should publish and maintain on a regular basis the following contents:

Additionally, at pre-contractual stages, FMPs and FAs are required to disclose on the integration of sustainability risks, which includes the following:

  • The manner in which sustainability risks are integrated;
  • The result of the assessment of the likely impacts of sustainability risks on the returns of the financial products they provide or advise on；
  • Provide reasons when they do not consider sustainability risks are involved

The SFDR categorizes financial products into general products (under Article 7), products that promote environmental or social characteristics (Article 8) and investments with sustainable objectives (Article 9), each linked to different regulations on non-financial disclosure. It is worth noting that even for general products that do not consider the adverse impacts of sustainability factors, disclosure will be mandatory from 30 December 2022. For Article 8 and Article 9 products, detailed requirements of disclosure are as follows:

The SFDR was gazetted – i.e., published in the Official Journal of the European Union – on 9 December 2019 and entered into force on 10 March 2021, while the rules on periodic reports will not be featured until 1 Jan 2022. A longer-span timetable is as follows: