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6 September 2023 Glossary

What is SFDR

Dive into the Sustainable Finance Disclosure Regulation, its significance in the financial sector and investors. How does SFDR provide clearer insights into ESG.

By Klappir

SFDR (Sustainable Finance Disclosure Regulation) is a comprehensive regulatory framework introduced by the European Union to enhance transparency and consistency in the disclosure of sustainability-related information by financial market participants and financial advisors.

Background of SFDR The SFDR aims to promote sustainable finance, provide investors with clearer insights into the environmental, social and governance (ESG) aspects of investment products, and prevent greenwashing, where investments are marketed as more sustainable than they actually are.

The Main Goals of the SFDR Regulation

The SFDR was introduced as a direct response to the EU's action plan, aiming to enhance and standardize the sustainability-related disclosures in the financial sector.

Its primary objectives are:

  • Transparency: establishing harmonized sustainability disclosure rules, ensuring investors receive consistent information to make informed decisions on sustainability risks and impacts
  • Preventing Greenwashing: combating "greenwashing" by mandating accurate disclosures about a product's environmental and social attributes.
  • Promoting Sustainable Investments: Through clear guidelines and transparency, the SFDR drives capital towards sustainable projects.
  • Integrating Sustainability Risks: requiring financial firms to prioritize sustainability risks when considering potential financial returns.

Who Does SFDR Apply to?

The Sustainable Finance Disclosure Regulation casts a wide net over the European financial market landscape, aiming to ensure that a broad spectrum of financial entities are held accountable for the sustainability of their products and services.

Entities Affected by the SFDR:

  • Investment Firms: Companies that manage portfolios or offer investment advice, ensuring that investments align with stated sustainability goals.
  • Asset Managers: Entities that make investment decisions on behalf of others, such as mutual funds, hedge funds, and private equity firms.
  • Insurance Companies: Especially those offering insurance-based investment products.
  • Pension Funds: Institutions that manage and invest the retirement savings of individuals.
  • Credit Institutions: Banks and other financial institutions that offer portfolio management.
  • Financial Advisers: Professionals who provide advice on financial products, ensuring that they inform clients about the sustainability aspects of their recommendations.
  • Alternative Investment Fund Managers (AIFMs): Managers of alternative investment funds, which can include real estate, commodities, and hedge funds.

While some entities are directly involved in the creation and management of financial products, others play a more advisory role, guiding consumers in their financial decisions. Regardless of their specific function, all these entities now have a responsibility to provide clear, accurate information about the sustainability of their offerings.

Key Provisions of the SFDR

The Sustainable Finance Disclosure Regulation introduces a set of pivotal provisions designed to enhance transparency, combat greenwashing, and promote sustainability within the European financial sector.

Entity-level disclosures

Entity-level disclosures outline how financial entities integrate sustainability into their strategies and operations, ensuring it's central to their ethos rather than a mere side consideration.

Product-Level Disclosure

Based on sustainability objectives and how ESG factors are considered in their investment strategies. The goal is to provide investors with a clear understanding of the sustainability characteristics of the products they invest in.

Principal Adverse Impact (PAI) reporting

Organizations required to disclose the adverse impacts of their investment divisions on sustainability factors, including environmental and social aspects. These disclosures aim to give investors insights into how their investments align with sustainability objectives

Regulatory Technical Standards (RTS)

Developed by the European Supervisory Authorities (ESAs), the RTS provide specific guidelines on SFDR disclosures, translating its broad objectives into clear, actionable standards for consistent implementation across the EU.

SFDR reporting

Klappir offers a sustainability management solution that helps organizations automate the collection and consolidation of their data. Here's how Klappir can assist organizations in reporting on the Sustainable Finance Disclosure Regulation (SFDR):

  • Transparent sustainability accounting and reporting.
  • Real-time data for continuous sustainability performance improvement.
  • Risk reduction through supplier tracking and transparent reporting.
  • Cost savings by identifying poor resource management.
  • Compliance with EU Sustainability Reporting Standards (ESRS).
  • An interconnected digital ecosystem for collaboration and societal contribution.

This ensures compliance with various sustainability directives, including the upcoming European Sustainability Reporting Standards (ESRS), and promotes continuous improvement based on real-time data.

Sustainable Finance Disclosure Regulation FAQ

What is SFDR Article 9?

Article 9 pertains to financial products that have sustainable investment as their objective. These products aim to make a positive environmental or social impact, often measured against a specific benchmark.

What is SFDR Article 8?

Article 8 relates to financial products that promote environmental or social characteristics. While not fully sustainable, they adhere to certain environmental or social criteria.

What is SFDR Article 6?

Article 6 mandates general disclosure requirements for all financial products, ensuring transparency about how sustainability risks are integrated into investment decisions and the potential impacts of those risks on returns.

When did SFDR come into force?

The Sustainable Finance Disclosure Regulation (SFDR) came into force on March 10, 2021.

By Klappir6 September 2023

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