Updated: Jun 22
Deep Dive in SFDR
Financial market participants and financial advisers are required to disclose specific information on their approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts. SFDR sets out sustainability disclosure requirements for a broad range of financial market participants, financial advisers, and financial products.
We have covered the APAC taxonomy regulations in our previous report in broader terms. This guide, on the other hand, presents a detailed instruction to EU SFDR with a step-by-step breakdown on exactly how to start complying with SFDR.
As we discussed in our previous research paper, SFDR has come into effect on March 10, 2021, and as a legal requirement in the EU, it, too shares a significant impact in the global market, whether its leading role to draw more rules to come in other regions or making an outreaching impact for businesses overseas.
By June 30 (2021), firms with more than 500 employees must publish a PAI statement. RTS (Regulatory Technical Standards) complies with further PAI details comes in level 2, which is expecting to come into force in 2022. However, some asset managers have considered the final RTS templates won’t be much different than the current draft RTS. Hence, asset mangers shall get ready for an update on the PAI statement according to the draft RTS before by the deadline in 2022 when time is on your side.
GC Insights has been preparing and growing the capacity to meet the SFDR requirements. Boosting sustainable business development is at the centre of our businesses. Contact us if you are struggling to benefit from SFDR and other sustainable business opportunities.
Objectives of SFDR:
“Financing Sustainable Growth” with its intention to clarify fiduciary duties and increase transparency in the field of sustainability risks and sustainable investment opportunities. The SFDR is set to increase transparency of sustainability-related disclosures and to increase comparability of disclosures for end investors.
To reduce information asymmetries in principal-agent relationships with regard to the integration of sustainability risks, the consideration of adverse sustainability impacts and the promotion of environmental or social characteristics as well as sustainable investment by means of pre-contractual and ongoing disclosures to end-investors, acting as principals, by financial market participants or financial advisers, acting as agents on behalf of principals.
Why do you need to consider SFDR?
Legal Obligations: Binding legal obligations as The European Climate Law dictates “Climate Neutrality” (i.e. net zero greenhouse gas emissions) in the EU by 2050 in pursuit of the long term temperature goal set out in the Paris Agreement.
Corporate ESG Accountability: corporate due diligence and accountability compliance requirements.
Adapt to the new norm: Given the environmental emergency situation, urgent action is needed to mobilise capital not only through public policies but also by means of the financial services sector. In order to adapt to this new environment, financial market participants and financial advisers should be required to disclose specific information on their approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts.
Technical advancements: One of the major concerns about making an update on SFDR disclosures is the lack of quality data. However, ESG data vendors are working on a data solutions for such hustle. SFDR disclosures might get easier if the ESG data vendors and due diligence are situated in place for firms to make further complains.
Funding ESG causes: SFDR is helping investors better understand and measure the ESG contributions from investee companies and institutional investors.
From 30 June 2021, financial market participants exceeding on their balance sheet dates the criterion of the average number of 500 employees during the financial year shall publish and maintain on their websites a statement on their due diligence policies with respect to the principal adverse impacts of investment decisions on sustainability factors. “Financial market participants shall publish on their website information about their policies on the integration of sustainability risk in their investment decision-making process.” — Regulation (EU) 2019/2088_SFDR
Where they consider principal adverse impacts of investment decisions on sustainability factors, a statement on due diligence policies with respect to those impacts, taking due account of their size, the nature and scale of their activities and the types of financial products they make available; Financial market participants shall include at least the following:
Where they do not consider adverse impacts of investment decisions on sustainability factors, clear reasons for why they do not do so, including, where relevant, information as to whether and when they intend to consider such adverse impacts.
Deadlines are fast approaching! Time to build your capacity upon it. GC Insights is on your side!
(written by Yitong Yuan)
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