ARTICLE
ESG disclosures: The new EU regime Background
Disclosures
March 2021 saw the phasing in of the Sustainable Finance Disclosure Regulation (SFDR) as part of a number of EU initiatives to promote investment towards the green economy and sustainable business development more generally. This particular measure seeks to combat ‘greenwash’ and help verify that financial markets are taking seriously the need for longer term and sustainable investment.
The SFDR applies to Financial Market Participants, a group of investors under ten categories in Article 2(1) of the regulation including, certain insurers, pension providers, portfolio and fund managers. Such entities need to disclose:
The measure is part of an EU Action Plan on Sustainable Finance, the aim of which is to: ■ shift capital flows away from activities that have negative social and environmental consequences; and instead ■ channel finance towards economic activities that have genuine long-term sustainability benefits. In particular the SFDR demands transparency on how market participants handle the risks of possible adverse sustainability impacts both for the product itself and for the entity handling the investment. The SFDR should be reviewed alongside two other measures: ■ the Climate Benchmarks Regulation which seeks to create new benchmarks to help investors compare the carbon footprint of their investments; and ■ the Taxonomy Regulation which provides a unified EU classification system of environmentally sustainable economic activities.
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■ policies on integration of sustainability risks in investment decision-making; ■ information on the extent of consideration of ‘principal adverse impacts’ of its investment decisions on sustainability (subject to size of entity); ■ remuneration policies and consistency with the integration of sustainability risks. There are also disclosures in relation to products which could include: ■ pre-contract disclosures to investors on the integration of sustainability risks into investment decisions; ■ likely impacts of sustainability risks on the financial product in question and its returns on the investment; ■ information on the mechanisms by which the financial product addresses ‘principal adverse impacts’ on sustainability factors It is permissible to state that sustainability risk is not relevant to a particular financial product but if this is done some statement of why this is so should be included. Where a financial product promotes, alone or in combination with other attributes, environmental or social characteristics, the following information should be disclosed:
