2023 marked a significant milestone in the world of private market ESG reporting with the introduction of the Sustainable Finance Disclosure Regulation (SFDR). This regulation is the first of its kind, mandating private market investors marketing their products as sustainable to publicly disclose their ESG performance.
As a refresher, what is SFDR?
SFDR is a framework created by the EU to foster openness and transparency in sustainable finance transactions. Essentially, Financial Market Participants (FMPs) are required to share the environmental and social impact of their transactions with stakeholders.
The primary goal of SFDR is to assist investors in making informed decisions and understanding how sustainability risks may affect their investments. The disclosure requirements aim to prevent 'greenwashing'—the act of making false claims about sustainable impact—ultimately facilitating the identification of authentic sustainable efforts and distinguishing them from greenwashing attempts.
SFDR is designed to build trust and confidence in sustainable finance, promoting a responsible and resilient financial sector committed to positive environmental and social outcomes.
What happened in 2023?
In its inaugural year, the SFDR brought sweeping changes to the private market investing ecosystem, prompting investors and executives to integrate these changes into their existing data management workflows. Here are the key takeaways:
Dynamic Regulatory Changes:
- The regulatory landscape for SFDR is evolving rapidly, requiring participants to stay abreast of the latest developments as they prepare for the 2024 reporting deadlines. The initial lack of clarity in regulation requirements led to a mid-reporting cycle shift in workflows. Staying updated on changes is crucial to ensuring final statements accurately reflect the evolving standards.
Challenges in Data Collection:
- Data collection for SFDR is a time-consuming process, demanding additional resources to meet key deadlines. Participants faced difficulties in communicating with their investments about SFDR data requirements. Executives encountered challenges in finding and aggregating PAI (Principal Adverse Impact) data for their investors. The consensus among participants is the need for more time and resources to manage the new data management workflows effectively.
Framework Diversification Challenges:
- SFDR PAI metric definitions and calculations differ from other existing frameworks, causing participants to scramble for tools to manage sustainability data across multiple standards. Frameworks like CSRD, EU Taxonomy, IRIS+, and SASB have unique sets of KPIs with different definitions and calculations. The lack of consolidation has participants grappling with sustainability data management at scale, emphasizing the imminent need for framework consolidation.
Uncertain Market Standards:
- The market demand for SFDR-compliant firms remains uncertain, as it is unclear how many FMPs achieved SFDR Article 6, 8, or 9 compliance in 2023. This uncertainty leaves participants unsure of how many peers will devote resources to achieving compliance, highlighting the need for greater clarity in market standards.
Looking Ahead to 2024
The EU just released its latest update to the Sustainable Finance Disclosure Regulation (SFDR) on December 4, 2023. It includes a number of new mandatory PAI metrics, changes to existing PAI metrics, and new disclosure templates and guidance.
Not to fear — Proof has you covered. We have already updated our SFDR metrics and assessments for the 2023 performance period so you’re ready to hit the ground running in the new year. Want to check out the updates? The new regulatory guidance is here.
In subsequent articles, we will delve further into the changes for the 2024 calendar year to ensure relevant stakeholders are well-prepared for upcoming deadlines. The journey with SFDR is ongoing, and market participants are navigating uncharted territory, adapting and refining strategies as they go.