What is the financial sustainability regulation?
The Sustainable Finance Disclosure Regulation (SFDR) introduces disclosure standards for financial market participants, advisors and products. The aim of the regulation is to minimise greenwashing and to provide a transparent view into sustainability investments for the end investor.
What is Financial Sustainability? At Advance, we define financial sustainability as the ability to start, grow and maintain your staffing business with short- and long-term financial stability.
SFDR aims to strengthen transparency obligations on ESG issues within the European Union, in particular to make it easier to compare financial products. SFDR imposes rules on the publication of information on the sustainability of an investment.
The main purpose of the SFDR framework is to enable investors and consumers to make more informed investment decisions contributing to the sustainable transition, by setting disclosure requirements covering a broad range of environmental, social & governance (ESG) metrics at both entity- and product-level.
Summary of Differences Between the SDR and SFDR
The UK SDR applies to issuers of bonds and shares listed on a UK regulated market and UK-based investment managers. The EU SFDR applies to entities established in the EU and extends to products marketed in the EU, regardless of the location of the entity.
The development of the financial system in a sustainable manner involves various activities. Examples of such activities include active ownership, credits for sustainable projects, green bonds, impact investing, microfinance, and sustainable funds.
Indicators of financial sustainability include strong stakeholder relationships, diversified funding, sufficient cash, realistic and justifiable levels of unrestricted reserves, robust risk management, and awareness of overheads.
Who does SFDR apply to? Every financial market participant or financial advisor based in the EU must comply with SFDR reporting, across asset classes and including private equity.
Our anti-greenwashing rule applies to all FCA-authorised firms who make sustainability-related claims about products and services. The investment labels, disclosure and naming and marketing rules apply to UK asset managers.
In the United States, the SEC requires all public companies to disclose information that may be material to investors, including information on ESG-related risks, and has issued guidance and rules setting forth its disclosure expectations.
What is the SFDR regulation in a nutshell?
SFDR in a nutshell
It mandates that Financial Market Participants (FMPs) communicate the environmental and social repercussions of their transactions to relevant stakeholders. The goal is to prevent greenwashing, and to foster transparency and openness within the realm of sustainable finance transactions.
Who Must Follow SFDR. The SFDR applies to all financial market participants and financial advisors that have EU shareholders or are explicitly marketing to EU shareholders. This means that a US-based business might be required to comply with the SFDR.
SFDR relies on self-assessment and self-reporting by financial firms. This may not always be reliable, either because of data quality or internal resource capacity. Some firms may be inclined to exaggerate or misrepresent their sustainability practices to attract investors or comply with the regulation.
Overall, the SFDR is applicable to two types of financial institutions: Financial advisers that provide investment or insurance advice concerning insurance-based investment products (IBIPs). Participants in the financial markets who produce and sell financial goods as well as provide portfolio management services.
The SFDR applies to financial market participants and financial advisors within the EU. This includes asset managers, institutional investors, insurance companies, and pension funds, among others.
SFDR mandates financial market participants to categorize their investment products as Article 6, 8 or 9, depending on the level of sustainability they demonstrate. Article 6 products, represented by a grey label, do not have sustainability features and can consider sustainability risks.
1. STRATEGIC AND FINANCIAL PLANNING 2. INCOME DIVERSIFICATION 3. SOUND ADMINISTRATION AND FINANCE 4.
There are two main types of ESG debt finance, Green Loans or Green Bonds, and Sustainability Linked Loans or Sustainability Linked Bonds. There are also Social Impact Bonds, Sustainable Bond and Transition Bonds.
Variables with positive impact on financial sustainability are as follows: Revenue/Total Assets, Total Assets/Current Assets, Price/Book Value, Net Profit/Equity, Current Assets/Current Liabilities, Retained Earnings/Revenue.
Everyone has four basic components in their financial structure: assets, debts, income, and expenses. Measuring and comparing these can help you determine the state of your finances and your current net worth.
What are the three classifications of SFDR?
SFDR classification
It requires portfolio managers to classify their strategies / products based on their sustainability performance. The three classifications are Article 6, Article 8, and Article 9.
ESG stands for Environmental, Social and Governance. This is often called sustainability. In a business context, sustainability is about the company's business model, i.e. how its products and services contribute to sustainable development.
SFDR Article 8: Light green funds. SFDR Article 8 products, also known as light green products, promote investments or projects with positive environmental or social qualities, or a combination of such characteristics, as long as the investments are made in enterprises that adhere to sound governance practices.
The Environmental Protection Agency (EPA) protects people and the environment from significant health risks, sponsors and conducts research, and develops and enforces environmental regulations.
There is currently no federal mandate for ESG (Environmental, Social, and Governance) reporting in the United States. However, there are various initiatives and regulations that require companies to disclose certain ESG information.
