With the June 30, 2023, reporting deadline for SFDR just around the corner, investors are busy making sure they have the processes and systems in place to stay compliant. This will include publishing pre-disclosure documentation, collecting or obtaining data from portfolio companies and populating disclosure templates for their LPs and auditors. For more information on what needs to be done to stay complaint and key dates, be sure to check out our SFDR overview and Workback Plan.
One approach Proof has seen is investors going in-house to get the process kickstarted, using their team(s) to begin data gathering and collation efforts. This includes up-skilling legal and compliance staff whilst investing in and/or adapting IT software and processes.
Our team has outlined some of the benefits to undertaking the effort with your own team before engaging with a more robust solution:
❶ Cost Savings
Hiring external consultants or using purpose-built software solutions can be potentially expensive if you're unsure of your initial compliance needs. Going in-house for your systems and processes can potentially save you from an additional expense early on by using existing staff resources and software.
👉 Pro Tip: Make sure you are considering the indirect costs which may be hidden, such as staff education or analyst time spent chasing, evaluating and aggregating data from portfolio companies. Check out our guide on the costs to be aware of before choosing to go in-house, as the costs can rise quickly.
Building your own systems and processes enables you to tailor them to the specific needs of your company. For example, there may be additional ESG metrics (beyond those that SFDR defines as mandatory) that you would like to measure across your portfolio. This could present time, scaling, and cost issues if you try to add these as a part of a standard consultation. However, by starting in-house, you can easily define which metrics you want to request from your portfolio companies during the data gathering process before transitioning to a more efficient solution to maintain this set of metrics later on.
👉 Pro Tip: There are always tradeoffs with increased customization in software (e.g., scalability, key person dependency, etc.). Take effort to prioritize the customization-to-scalability balance properly, and be sure to plan for when you might need to scale back due to the limitations of entirely in-house tools and processes.
❸ Greater Flexibility
SFDR is a fast-moving and evolving landscape. What’s more, it's widely expected that the sustainable reporting demands will increase across the board. Having your own systems and processes in place could allow you to quickly adapt to changes in regulation or business needs without incurring additional expense that would be required if you need to scale reporting with an advisory partner.
👉 Pro Tip: To help your team pivot with changes quickly, consider adopting agile approaches as borrowed from SaaS companies and software development teams. Agile processes emphasize flexibility, collaboration, and rapid iteration — all of which are invaluable for SFDR implementation as the EU finalizes PAI formulas and provides clarification on the regulation in the coming years.
❹ Learning Opportunity
SFDR — and sustainability reporting in general — can offer invaluable learning and skills development opportunities for your team. Going in-house can enable your staff to become more effective in considering full-chain data management, reporting, and how to translate from solely compliance efforts to strategic performance.
👉 Pro Tip: While taking on the process in-house to get started can encourage skill growth across your team, be sure to evaluate the base knowledge and time required to accurately interpret and apply the regulation – as well as to handle project management tasks across your entire portfolio.
Overall, beginning the SFDR process in-house can potentially be a cost-effective and efficient starting place to ensuring your company’s reporting stays up-to-date and that you are working to reduce risk of noncompliance for your business and stakeholders. However, it's important to carefully consider the resources and time required to build, maintain, and scale your own reporting systems and processes to ensure accurate and auditable disclosures.
While beginning in-house can offer clear benefits, be sure to also consider the costs and potential pitfalls of undertaking this approach while evaluating. Looking for an automated way to get started or ready to transition to a more robust solution that can scale with your fund(s) and regulation changes? Be sure to contact our Sales team to discover if Proof is a good fit for your organization.
Not sure if you even need to report under SFDR? Take our brief Eligibility Assessment to determine if compliance is required with the EU regulation.