Sustainable Finance Disclosure Regulation (SFDR) is set to enhance transparency and accountability in sustainable investing. Launched in 2021, SFDR sets out mandatory disclosure requirements for asset managers, ensuring that sustainability claims are backed by data and stick to standardised reporting criteria.
For asset managers, however, SFDR is much more than regulatory box-ticking. It allows asset managers to build trust with investors and stakeholders, avoid potential greenwashing accusations, and align with global sustainability trends. However, compliant SFDR reporting requires a clear understanding of elements such as the EU taxonomy, disclosure classifications, as well as reporting obligations.
In this article, we’ll go into exactly what SFDR means, the challenges it presents for asset managers, and how GaiaLens can help streamline compliance.
What Does SFDR Mean?
SFDR, or Sustainable Finance Disclosure Regulation is a framework designed to increase transparency through mandated, standardised sustainability disclosures. It’s there to help investors make informed decisions on their investments, based on how well specific funds consider ESG factors.
The SFDR approach is the EU-specific framework of the UK’s SDR framework.
What is the SFDR regulation in a nutshell?
SFDR introduces a disclosure regime, and requires asset managers to communicate how they consider and prioritise sustainability risks across products and services. There are three levels of sustainable integration, which investors use to make informed investment decisions:
Article 6: Funds that don’t promote sustainability
Article 8: Funds that do promote environmental or social characteristics, or a combination of the two
Article 9: Funds that have a sustainable investment objective
Who reports under SFDR?
There are a few parties in the financial services industry that must be reporting under SFDR. These include:
Asset managers offering funds within the EU
Financial advisors providing investment recommendations
Institutional investors under the EU framework
Key SFDR Reporting Requirements for Asset Managers
Understanding the reporting requirements is crucial for compliance. There are a few areas that asset managers must focus on.
SFDR classifications
As previously mentioned, the cornerstone of SFDR reporting and compliance are within the classification articles 6, 8 and 9. Asset managers must clearly justify why funds are listed within each article to improve transparency for investors.
Mandatory PAIs
Principal Adverse Impact (PAI) statements are a critical component of SFDR reporting, and require asset managers to share any negative ESG impacts of funds.
These negative impacts could be:
Greenhouse gas emissions
Loss of biodiversity
Water usage
Pollution
Waste generation and management
Reporting metrics
Standardised reporting ensures comparability between funds, which can improve transparency with investors and stakeholders. This is why asset managers need to report on a number of metrics to stay SFDR compliant.
These metrics could be:
Aligning with EU Taxonomy for environmentally sustainable activities
Emissions, diversity, and corporate governance metrics
How ESG risks and opportunities are assessed
Challenges With SFDR Reporting
While FDR reporting promotes transparency, there are also significant challenges that asset managers face.
Data collection and analysis
Collecting, analysing and reporting on mass amounts of data can be difficult and very time consuming, especially when dealing with complex portfolios and qualitative data sources. These data sources can often be inconsistent, particularly from company to company, which takes time — up to 20 hours per portfolio.
To save time on reporting, analysts can lean on AI and automation to compile these reports and find the information that’s relevant to their stakeholders.
Learn more about how the GaiaLens PDF chatbot can save hours of sifting through annual company reports, by extracting only the information you need.
Limited resources
When dealing with multiple reports, asset managers often lack the resources to manage SFDR compliance effectively. Under SFDR reporting, funds must make a certain number of claims about the ESG activity of the companies in which investments are made. This means that asset managers must find a way to efficiently and quickly collect and analyse data.
By using an automated response to collating and analysing data, asset managers can spend less time on reporting, and more time on researching. Our real-time monitoring allows asset managers to keep track of the latest regulations, allowing for more accurate ESG reports.
Aligning investment goals
ESG regulation and disclosure requirements differ around the world. This means that it can be difficult to align investment goals, especially with global funds. Different sets of requirements can take time to pull together to create an SFDR-compliant report, and some data may even be missing.
GaiaLens’ sustainability frameworks allow for more accurate ESG reporting, giving stakeholders and investors the chance to better manage assets. In just three clicks, asset managers can generate reports on entire portfolios, ensuring that all investment goals are fully aligned.
Leave Reporting To AI-Powered Solutions
Navigating through SFDR compliance doesn’t have to be a burden — GaiaLens’ software allows asset managers to simplify and speed up the reporting process. This allows for enhanced transparency, leading to stronger investor relationships.
Are you ready to simplify your SFDR compliance journey? Get in touch with our team, or sign up for a free trial today.
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