What is SFDR?
SFDR requires fund managers to establish ESG investment principles, integrate sustainability risks, assess adverse sustainability impacts, and promote environmental or social characteristics.

What is SFDR?

The Sustainable Finance Disclosure Regulation (SFDR) was introduced in Europe to improve transparency in the market for sustainable investment products, prevent greenwashing and increase transparency around sustainability claims made by fund managers and other market players.

Introduced in 2021, it requires fund managers to integrate sustainability risks, assess adverse sustainability impacts, and promote environmental or social characteristics.

In practice, this means fund managers must establish their Environmental, Social and Governance (ESG) investment principles, apply them to new investment opportunities, and disclose performance data to their investors.

What’s the goal?

This Regulation seeks to provide more transparency regarding how financial market participants and financial advisers integrate sustainability risks into their investment decisions and investment or insurance advice.

Where the sustainability risk assessment leads to the conclusion that there are no sustainability risks deemed to be relevant to the financial product, the reasons should be explained.

Where the assessment leads to the conclusion that those risks are relevant, the extent to which those sustainability risks might impact the performance of the financial product should be disclosed either in qualitative or quantitative terms.

The sustainability risk assessments and related pre‐contractual disclosures by financial market participants should feed into pre‐contractual disclosures by financial advisers. Financial advisers should disclose how they take sustainability risks into account in the selection process of the financial product that is presented to the end investors before providing the advice, regardless of the sustainability preferences of the end investors.

The consideration of sustainability factors in the investment decision‐making and advisory processes can realise benefits beyond financial markets. It can increase the resilience of the real economy and the stability of the financial system. In so doing, it can ultimately impact the risk‐return of financial products.

When does SFDR come into effect?

The SFDR came into effect in 2 phases:

  1. Core Disclosures (Level 1) has been effective since March 2021
  2. Enhanced Disclosures (Level 2) has been effective since January 2023.

Is it mandatory?

Yes, for anyone selling a financial product. Pensions, annuities, insurance-based investment funds, and portfolio management must comply with SFDR.

How do you become compliant with SFDR?

The goal of the latest Delegated Regulation under SFDR is to improve the quality and comparability of information the financial market participants and financial advisers have to provide.

For fund managers:

Prepare a statement for the fund to explore and address the risks and opportunities related to sustainability, namely the principal adverse impacts of investment decisions or financial advice on ESG sustainability.

Submit it for review by an external auditor.

Add the statement to investment documents to disclose to investors (pre-contractural product disclosures).

Upload to the website information about how sustainability risks are integrated into investing decision-making processes and financial advice and the remuneration policies consistent with integrating sustainability risks.

For companies seeking investment:

Considering the requirements of SFDR, fund managers will request ESG risk assessment from their investment candidates. A proactive strategy is to conduct and publish an ESG assessment tailor-made on size and sector.

(A recent survey conducted by KPMG showed that investors are increasingly conducting ESG due diligence on current and future deals, showing how ESG risk factors are becoming a closing condition, a lower purchase price or a deal-stopper.)

How we can help

Bloom can prepare an ESG framework for fund managers to add to their SFDR disclosure documents.

We gather data from your portfolio companies and help them comply with the ESG framework that the fund has adopted.

There’s more where that came from!

Grab our newsletter so you don’t miss a post. We’ll share the most valuable tips and articles about how to become more sustainable.

You may also like…

What is the Net Zero Banking Alliance?

What is the Net Zero Banking Alliance?

The Net Zero Banking Alliance (NZBA) is a global coalition of banks and lenders that are committed to supporting and aligning with the goals of the Paris Agreement on climate change by helping to finance the transition to a net zero carbon economy.

What PCAF and CDP Data Quality Scores Mean

What PCAF and CDP Data Quality Scores Mean

The CDP (Carbon Disclosure Project) and PCAF (Partnership for Carbon Accounting Financials) have issued standards for organising and reporting data. What does that mean for your business?