10 March 2021
The Sustainable Finance Disclosure Regulation (SFDR)
The aim of the SFDR regulations is to provide more transparency on sustainability within the financial markets in a standardised way, thus preventing greenwashing and ensuring comparability.
Promoting sustainability within the financial world
In 2018, the European Commission published the EU Sustainable Finance Action Plan aimed at promoting sustainability within the financial world. These regulations are also called ESG regulations because the respective rules are based on Environmental, Social and Governance (ESG) criteria.
What is SFDR?
The SFDR is the frontrunner of the set of regulations resulted from the European Action Plan for Financing Sustainable Growth. The aim is to provide more transparency on sustainability within the financial markets in a standardised way, thus preventing greenwashing and ensuring comparability. SFDR regulation introduces various disclosure-related requirements for financial institutions at entity, service and product level. This new disclosure obligations will be applicable as of March 10th 2021.
What is the scope of SFDR?
The SFDR mainly applies to financial institutions (banks, insurers, insurance intermediaries, asset managers and investment firms) operating within the EU. The requirements applies to financial products such as:
What are the disclosure obligations?
As a result of the SFDR, financial institutions must make certain (ESG-related) sustainability information public at an entity and product level. This information must be provided on the website and in the pre-contractual phase and in addition, in a later phase, periodic information will be provided via reporting. These information obligations apply to all financial market parties, regardless of whether they are specifically concerned with sustainability or not.
Disclosure obligations at entity level
At the entity level, multiple disclosures are required in the investment process and when providing investment advice
Disclosure obligations at product level
Transparency requirements with regards to sustainability also apply at a product level. The pre-contractual information must indicate how sustainability risks are taken into account in investment decisions and within advice, how this affects the expected return or why they are not relevant. If a sustainable product is offered, additional information requirements apply. Additional information about the sustainability of the investments must then be provided to prevent all kinds of investments from being incorrectly advertised as "green" or "sustainable" ("greenwashing").
Under the SFDR regulation there are different product categories: