The European Commission published its action plan on sustainable finance in 2018, with the aim of creating a roadmap for sustainable finance across three categories:
- reorienting capital flows toward a more sustainable economy
- integrating sustainability into risk management
- fostering transparency and long-termism
The Sustainable Finance Disclosure Regulation (SFDR) came into effect on March 10, 2021.
Under the SFDR, financial market participants such as asset managers, investment advisors, and financial advisors are required to disclose certain ESG-related information about their investment products, including funds and portfolios.
This information must be disclosed to investors in pre-contractual documents, such as prospectuses and Key Investor Information Documents (KIIDs), and on the companies’ websites.
This information includes, among others, information on how the investment products integrate ESG factors, how sustainability risks are assessed, and how remuneration policies are aligned with sustainability objectives.
In addition, the SFDR establishes a classification system for sustainable economic activities, known as the EU Taxonomy. This taxonomy sets out criteria for determining whether an economic activity is environmentally sustainable, and it provides a common language for investors to assess and compare the environmental performance of different investments. Financial market participants are required to disclose the extent to which their investment products are aligned with the EU Taxonomy.
The SFDR is part of the EU’s broader efforts to promote sustainable finance and to achieve the goals of the Paris Agreement and the United Nations Sustainable Development Goals. By improving the transparency and comparability of ESG-related information, the SFDR aims to encourage more sustainable investments and to facilitate the transition towards a low-carbon and more sustainable economy.
Sources: European Commission: Sustainable Finance Disclosure Regulation (SFDR)
