The SFDR (Sustainable Finance Disclosure Regulation), a flagship regulation in sustainable finance, was published in 2019 and sets transparency obligations for financial players within the European Union. It requires financial institutions – asset managers and financial advisors – to disclose detailed information on how they integrate ESG factors into their investment strategies, decisions, and advice, especially regarding sustainability risks and adverse impacts.

1. Key Obligations and Implications for recipients:

• • Disclosure of sustainability risk consideration in investment decisions (Article 6).

• • Reporting on Principal Adverse Impacts (PAIs): At least 14 specific indicators on environmental, social, and societal aspects, such as greenhouse gas emissions or human rights violations, must be reported (Article 7).

• • Classification of Financial Products based on their consideration of ESG factors:
    • • Article 6: Products that do not specifically consider sustainability criteria.
    • • Article 8: Products promoting environmental or social characteristics.
    • • Article 9: Products designed for sustainable investment.

• • Accessibility of Information on products and companies, to be available on websites, in pre-contractual documents, and in periodic reports.

Implications for recipients:

• • Increased transparency allows investors and savers to make informed choices regarding responsible and sustainable investments.

• • For asset managers and financial advisors, it requires additional work, particularly in collecting, verifying, analyzing, and reporting ESG data.

• • Better consideration of ESG factors also helps identify risks and impacts that portfolios face, ensuring better long-term performance.

2. Main obstacles and difficulties

Implementing the SFDR presents several major challenges.

The implementation of the SFDR presents several major challenges.
Lack of ESG Data harmonization: Historically, inconsistent and non-comparable data across companies and rating agencies made it difficult to collect and compare the information required for disclosure.

• • Improvements Over Time: While corporate reporting practices have improved, the collection, verification, and analysis of relevant data remain complex. The CSRD (Corporate Sustainability Reporting Directive) is expected to bring significant changes, making portfolio management and transparency easier.

Greenwashing Risks: The promotion of products and practices labeled as sustainable or responsible without substantial proof of their impact is a significant concern.

• • Balancing Transparency and Confidentiality: This is particularly challenging in finance, where granular transparency requirements can complicate product construction and management. To address these issues, sustainable finance regulations, including SFDR, allow for phased implementation alongside the “comply or explain” principle, facilitating a smoother transition for market practices.

Operational Costs: Compliance-related costs, including investment in data collection and monitoring systems, ESG ratings, and team training, can be substantial, particularly for smaller firms.

• • Resource Constraints: A lack of financial, technical, and human resources can hinder compliance, requiring accessible and reliable solutions.

Rapid Evolution of Regulatory Requirements: This creates uncertainty, with companies constantly needing to adjust their strategies and disclosures.

• • Staying Informed: Keeping up with the latest regulatory developments and surrounding oneself with highly competent and trusted partners is crucial.

3. Implementation schedule

The SFDR, voted on and published in 2019, came into force on March 10, 2021, with a phased implementation:

• • March 2021: First phase, with general disclosure requirements, including the classification of financial products under Articles 6, 8, and 9, and PAI disclosure, applying the “comply or explain” principle.

• • June 2022: Introduction of Regulatory Technical Standards (RTS), providing more precise transparency guidelines.

• • January 2023: Second phase, strengthening technical reporting obligations on PAIs at both the entity and product levels, including pre-contractual and reporting documents.

• • 2024: Current phase, with new reporting obligations expected to come into effect, particularly regarding the European Taxonomy and the CSRD.

These different phases enable financial players to adapt gradually, but also require continuous monitoring to keep up to date and anticipate new obligations.

4. Latest regulatory updates

Recent SFDR updates have primarily focused on clarifying financial product classification criteria and better alignment with the European Taxonomy. This has made definitions more precise, particularly for products under Articles 8 and 9. .

Recent adjustments include :

• • Clarification of Article 9 Products: These must explicitly aim for sustainability objectives by investing entirely in assets that contribute to environmental and/or social goals, while Article 8 products focus on promoting ESG characteristics without a minimum sustainability target.

• • Alignment with the European Taxonomy: The SFDR now requires financial products to indicate their degree of eligibility and alignment with sustainable economic activities defined by the Taxonomy, including natural gas and nuclear energy.

The aim is to reduce the ambiguity surrounding the definition of a sustainable investment and reinforce the credibility of products classified as such.

5. Practice results

In practice, the SFDR has pushed financial actors to rethink their product offerings to better meet the growing expectations of investors regarding sustainability. Many institutions have adjusted their product range to comply with SFDR classifications, with a noticeable trend toward labeling more products as falling under Article 8 or 9. However, this has raised concerns about greenwashing and compliance, especially considering technical standards. Some institutions that initially over-classified their products to attract investors have had to reclassify them under Articles 6 or 8 to avoid non-compliance and legal liability.
Despite initial difficulties, the quality and availability of ESG information have improved, helping investors better assess risks and opportunities related to sustainability. By providing greater transparency, the SFDR has strengthened investor confidence in sustainable products and stimulated demand in this area.

6. Suggestions on how to navigate this regulation

To effectively navigate this complex regulatory framework, several approaches can be adopted:

• • Proactive and Future-Proof Approach: Integrate ESG criteria from the outset when designing financial products and management strategies. This will facilitate compliance while offering real added value to investors.

• • Strengthen Data Collection: Invest in ESG data collection, analysis, and tracking solutions to simplify management and disclosure while increasing the reliability and consistency of data.

• • Ongoing Training: Ensure asset management and compliance teams are continuously trained on the latest regulatory developments and best practices to avoid mistakes and enhance credibility.

• • Collaboration with Expert Partners: Work with specialized consultants or auditors in sustainable finance to ensure internal practices meet the best market standards and reduce risks.

• • Stakeholder Engagement: Communicate clearly and transparently with investors to build trust and avoid accusations of greenwashing.

In conclusion, although the SFDR brings challenges in terms of compliance, it is primarily an opportunity for financial players to position themselves as leaders in sustainable finance in Europe.

Sources and useful links :

Règlement (UE) 2019/2088 du Parlement Européen et du Conseil du 27 novembre 2019 sur la publication d’informations en matière de durabilité dans le secteur des services financiers, OJ L, vol. 317, November 27, 2019, http://data.europa.eu/eli/reg/2019/2088/oj/fra.

Summary Report of the Open and Targeted Consultations on the SFDR assessment 14 September 2023 – 22 December 2023, https://finance.ec.europa.eu/document/download/0f2cfde1-12b0-4860-b548-0393ac5b592b_en?filename=2023-sfdr-implementation-summary-of-responses_en.pdf Sustainability-related disclosure in the financial services sector, https://finance.ec.europa.eu/sustainable-finance/disclosures/sustainability-related-disclosure-financial-services-sector_en