The first stage of the European Union’s (EU’s) Sustainable Finance Disclosure Regulation (SFDR) came into effect on March 10, 2021. Despite it is seemingly complex, the initiative has one core objective – avoid the ‘greenwashing’ of financial market participants.
“SFDR sets out rules on transparency and requires FMPs to disclose how they consider sustainability risks in their investment processes and products and how they deal with principal adverse impacts of their investment decisions on sustainability factors, ”
~ Rebecca Macé-Balebs, senior associate at Ogier.
To accomplish this, asset managers will be required to publish pre-contractual as well as disclosure statements on their websites, distinguishing their products into three major categories:
- Funds investing in companies with a specific sustainability objective
- Funds that promote environmental sustainability but does not have a specific objective
- Funds that are not having any ESG factors or goals
“The new regulation is about providing more transparency and authenticity for our clients—eliminating examples of ‘greenwashing’ or those products where sustainability is not truly embedded into processes. Investors want their provider to become more motivated in telling investors how they are integrating ESG factors into their business strategies and identifying new products, which puts sustainability at the top of their requirements.”
~Julian Ide, head of Emea distribution
The SFDR regulation falls under the European Union’s/United Nation’s 2030 Agenda for Sustainable Development. Its goal is to push around €1 trillion into green investments over the next decade.
Despite its honorable aims, the SFDR creates a significant additional administrative load for asset managers. The deeper impact of it would actually translate into firms having to take more strategic and informed decisions about their sustainability approach and more specifically whether and how the sustainability impact is measured.
How ready European asset management industry is for SFDR and ESG?
A recent report based on a March-April 2021 survey of 21 European asset managers and 14 asset owners, including insurance companies and pension funds looks in detail at the current state of readiness to comply with regulations and the respective changes and challenges.
The study is performed by the Global SaaS provider Clearwater Analytics and the global consulting firm Sionic in March-April 2021.
See a summary of the results here