The Essentials of SFDR: a Complete Guide to Accelerate Your Green Transition

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Finding your way through the Sustainable Finance Disclosure Regulation can be tricky. Greenomy simplifies all you need to know. Read more to discover the following: 
 

• Background of the SFDR
• What is the Sustainable Finance Disclosure Regulation (SFDR)?
• From SFDR Level I to Level II
• Who is Affected by the SFDR?
• SFDR: What & How to Report?
• SFDR: What & How to Report at Entity Level?
• SFDR: What & How to Report at the Product Level?
• How are Funds Classified by the SFDR?
• When Does the SFDR Come into Effect?
• How to Get Started for the SFDR with Greenomy?
• Download your Free Complete Guide on the Essentials of SFDR

Background of the SFDR

In December 2019, the European Commission (EC) announced a European Green Deal, which sets out a roadmap for tackling climate change, making the EU’s economy sustainable and achieving carbon neutrality by 2050.

The Sustainable Finance Disclosure Regulation (SFDR) was introduced by the EC (followed shortly by the EU Taxonomy), as part of a package of legislative measures arising from the Action Plan on Financing Sustainable Growth. It was established to encourage the flow of private capital into the sustainable finance space.

What is the Sustainable Finance Disclosure Regulation (SFDR)?

The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation designed to increase the ESG transparency of financial products of Financial Advisers (FAs) and Financial Market Participants (FMPs). It subsequently encourages capital to flow towards more sustainable investment options while preventing greenwashing.

To do so, the SFDR requires FAs and FMPs to provide standardized disclosures on how ESG/Sustainability factors are integrated at both an entity and product level, as well as the consideration of the Principle Adverse Impacts (PAIs) of their investment decision on sustainability factors at the entity level. As of January 2023, stakeholders also need to comply with the SFDR Regulatory Technical Standards (RTS).

From SFDR Level I to Level II

In April 2022, the EC published the Regulatory Technical Standards (RTS) to provide more clarification and guidance on the interpretation of the SFDR. There are two levels to the SFDR:

• SFDR Level I: High level/ principles based perspective (effective since March 2021)
  It requires financial institutions within the EU to make principles-based disclosures on ESG-related activities. This means that FAs and FMPs have to report on the sectors they are investing in and their investees as well as to disclose their Sustainability Risk Policies at entity level and how their Remuneration Policies take sustainability into account
• SFDR Level II: Regulatory Technical Standards (effective in January 2023)
  It requires financial institutions to disclose the following:
• The entity-level Principal Adverse Impacts (PAIs) reporting template and indicators
• The mandatory Pre-contractual / Periodic templates for Article 8 and 9 products

Who is Affected by the SFDR?

Two profiles are affected by the SFDR

1. Financial Advisors (FAs) providing investment or insurance advice
2. Financial Market Participants (FMPs) that produce and sell financial products

SFDR: What & How to Report?

SFDR: What & How to Report at Entity Level?

The objective of the entity-level disclosure is to demonstrate how the entity integrates “sustainability risks” that affect both their investment values and society overall.

The reports should be made available on the entity’s website and include the following:

1. Information about policies being implemented to integrated Sustainability Risks in the investment decision-making process.
2. An explanation of how the Remuneration Policy is consistent with the integration of Sustainability Risks.
3. Principal Adverse Impacts (PAIs) - disclose whether the PAIs are considered in the entity’s investment or insurance advice (comply or explain principle), except for FMPs with more than 500 employees, for which it is mandatory.

Download your official PAIs template here.

SFDR: What & How to Report at the Product Level?

Product-level disclosure affects pre-contractual (client information, brochure, etc.) and periodic disclosures, which are to be published, updated and maintained on the product website.

How are Funds Classified by the SFDR?

To help asset managers disclose the level of sustainability of their investments, the SFDR is categorised into different articles: 

• Article 6, also called grey funds
• Article 8, also called light green funds
• Article 9, also called dark green funds

When Does the SFDR Come into Effect?

The SFDR regulation started in 2021 with the idea of progressive implementation.

Subsequently, between the 1st of January 2022 and the 31st of December 2023, financial undertakings have to disclose the percentage of their assets that are Taxonomy-eligible under the EU Taxonomy regulation. From the 1st of January 2024, they will have to disclose the percentage of assets that are Taxonomy-aligned under the EU Taxonomy regulation.

On the other side, the SFDR Level II comes into effect on the 1st of January 2023. Disclosure must be then done according to RTS at entity- and product- level.

How to Get Started for the SFDR with Greenomy?

Implementing the SFDR poses high costs in both time and capital for FMPs and financial advisers who will need to create new systems and procedures to ensure compliance.

With a general lack of data relevant to reporting requirements and the absence of the tools needed to assess, transform and manage data, financial market players face a major roadblock in meeting EU Taxonomy and SFDR  requirements

…Enters Greenomy.

Greenomy helps corporates, credit institutions and asset managers to comply with the new EU Sustainable Finance Regulations (EU Taxonomy, SFDR, NFRD/CSRD) by digitalizing the data capturing and reporting process. That means we can help you to automatically assess, screen and report your EU Taxonomy alignment and support you in redirecting your funds towards sustainable activities in line with the EU Green Deal.

Our innovative SaaS solution establishes an all-encompassing sustainability data and analytics ecosystem that connects all critical stakeholders, so that companies, banks and investors have access to a market infrastructure and a one-stop-shop solution for their operations. 

Want to know more about how Greenomy can help you with your SFDR reporting and improve your sustainability? Book a demo today.

Download your Free Complete Guide with the Essentials of SFDR

Because we know that starting with the SFDR can get tricky, Greenomy summarizes all you need to know in a comprehensive free guide. 

Download your free SFDR ebook here.