What is the Sustainable Finance Disclosure Regulation (SFDR)?

In 2019, the European Union created a new transparency framework, the Sustainable Finance Disclosure Regulation (SFDR) or EU Disclosure Regulation. The regulation specifies how financial market participants must disclose sustainability information about their strategies and products. The SFDR was passed in 2019 and came into force in March 2021. Specifically, different regulations for different financial products were introduced in two stages : first in 2021 and then in 2023.

Essentially, the EU is pursuing the following goals with the SFDR : It wants to achieve greater sustainability, particularly with regard to environmental, social and governance (ESG) criteria, by investing more money in environmentally friendly and socially responsible companies. In addition, the SFDR should serve to find general standards for reporting. The additional information from the Disclosure Regulation is intended to help investors who want to invest their money in sustainable companies in their decision-making process.

In doing so, the EU also wants to advance a major political goal: the transition to a net-zero economy with the help of private funds. Greater transparency and the introduction of standards are also intended to make greenwashing of financial products more difficult: products must not be advertised as sustainable without explaining how this sustainability is achieved.

Together with the EU Taxonomy Regulation and the Corporate Sustainability Reporting Directive (CSRD), the SFDR is intended to be a core element of sustainability reporting (Fin.Connect.Basics on the EU Taxonomy , Fin.Connect.Basics on the CSRD). The individual regulations complement each other, so financial products that are advertised as sustainable in accordance with the SFDR (according to Articles 8 and 9) must also display a certain taxonomy quota. This indicates the proportion of ecologically sustainable investments in the product. The CSRD, which came into force at the beginning of 2023, ensures that financial institutions can more easily obtain information about the sustainability of companies and better meet their disclosure obligations.

Who is obliged to report what?

The scope of the SFDR is wide-ranging: it primarily affects developers and providers of financial products and financial advisors, such as insurance companies, banks, asset managers, etc. It includes all financial market participants and advisors based in the EU, as well as investment managers or advisors outside the EU who sell their products in the EU. The regulation covers both product-related and company-related disclosure obligations. 

At company level, according to the SFDR, information on the consideration of sustainability risks and significant negative impacts must be published on the companies' websites (Articles 3 and 4). According to Article 4, the Principle Adverse Impacts Statement (PAI Statement) is important. Accordingly, companies must indicate on their website whether they take into account the main disadvantages of investment decisions for sustainability factors (the PAI statement). If they do this, they will have to disclose their carbon footprint , for example. If not, they must explain their reasons for doing so, following the comply or explain principle . The SFDR also requires transparency about remuneration policies related to sustainability risks (Article 7 SFDR).

The product-related disclosure obligations require financial market participants to provide pre-contractual information for each financial product to take sustainability risks into account in their investment decisions. Otherwise, in case of doubt, they must explain why or that they do not consider the sustainability risks to be relevant (Articles 6 and 7 SFDR). 

If a financial product is advertised with ecological and/or social characteristics but does not have a sustainable investment as its main purpose, additional disclosure obligations apply in accordance with Article 8 SFDR. For products that are to be considered “sustainable investments” under Article 9, financial institutions must also disclose more information. The more you consider or promote sustainability in a product, the more information you have to disclose.

The providers of financial products must, in particular, disclose progress in achieving the sustainability goals in their reports (Article 11 SFDR). The information (according to Articles 8, 9 and 11 SFDR) must be published on the website and always kept up to date (Articles 10, 12 SFDR). 

The duties of the SFDR are made more specific in the Delegated Regulation published on this subject . These contain the Technical Regulatory Standards of the European Regulatory Authorities (ESA), which specify in more detail what content companies must disclose in accordance with the SFDR. For example, sustainability indicators are defined, such as greenhouse gas emissions. The regulation also provides standardized templates for product-related disclosure that must be used. The company-related disclosure obligation, the “PAI statement” according to Article 4, is also specified. In February 2023, an update to the Delegated Regulation was published regarding disclosure of portfolio links to gas and nuclear activities.

 

Where can I find binding and helpful information?

The most important sources on SFDR are the official guidelines on SFDR issued by the European Union. For the more precise content that should be disclosed, companies must specifically observe the Delegated Regulation and its update. An overview page from the European Commission provides a general explanation of the goals and a timeline .

Helpful overviews and summaries of the SFDR can be found on the websites of the Research Center for the Energy Industry and the Federal Financial Supervisory Authority .


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