As of March 2021 the new Sustainable Finance Disclosure Regulation [SFDR] came into effect. This regulation is developed to drive sustainable investment. The SFDR will have big impact on asset managers, banks and fund brokers. In the upcoming weeks we will publish a blog series focusing on the SFDR, the obligations, the timelines, the definitions and the Adverse Sustainable Impacts Statement to help you get your head around the subject. And to ensure you are well prepared for the new regulation.
This blog post was first published on October 6, 2020 and updated on May 5, 2021.
The origin of the SFDR
In December 2015, 195 countries signed the Paris Agreement to adapt to climate change. According to the European Commission [EC], sustainability and the transition to a low-carbon, more resource-efficient and circular economy are key in ensuring long-term competitiveness of the EU economy.
About one and a half year ago, in March 2018, the EC has released their action plan on Financing Sustainable Growth. The action plan aimed to:
- Reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth;
- Manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and
- Foster transparency and long-termism in financial and economic activity.
One and a half year later, in November 2019, this action plan has resulted in two new regulations:
- EU Regulation 2019/2088 on sustainability‐related disclosures in the financial services sector, which will be referred to as the SFDR regulation; and
- EU Regulation 2019/2089 amending Regulation (EU) 2016/1011 regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks, which will be referred to as the CO² Benchmark regulation.
In this blog series we will focus on the first regulation mentioned: The SFDR.
What is the SFDR?
What is the SFDR?
The SFDR is a set of sustainability-related disclosures for Financial Market Participants and Financial Advisers. The first details of the requirements for the SFDR regulation were published by the European Supervisory Authorities [ESAs] in April 2020 in a consultation paper. Recently in February 2021, the ESAs published their final report on the draft Regulatory Technical Standards [RTS]. This report sets out the proposed RTS on content, methodologies and presentation of disclosures as required by the SFDR regulation. The report also provides templates for disclosing information via the Adverse Sustainability Impact Statement, periodic reports and via pre-contractual disclosures. Some changes can be identified between the draft RTS found in the Joint Consultation paper and the version in the final report.
When is the SFDR coming to effect?
The SFDR regulation will impose substantial reporting duties to Financial Market Participants [FMPs] and Financial Advisers [FAs]. The effective date for the Level 1 requirements the regulation is March 10, 2021. The first reference period will start on January 1, 2022. This is also the starting point for the Level 2 requirements. Reporting requirements and publication schedules vary per type of FMP and the investment product or service that are offered.
What to expect as Financial Market Participant or Financial Adviser
In addition to the short time span, as the EFAMA states in their response on the consultation paper, there are some challenging hurdles to overcome to comply with this regulation. One of these challenges lies in collecting, calculating and processing (ESG) data correctly to fulfill the reporting obligations.
Most of the data are not traditional types of Market Data such as reference data, portfolio data and pricing data. The required data metrics involve for example ESG data which stands for Environmental, Social & Governance data. ESG data comprises data on aspects such as energy consumption, climate, usage of natural resources and good governance.
The devil is in the data
Based on the template of Annex I on the Principal Adverse Impacts Statement of the consultation paper, we foresee that in order to comply with the regulation FMPs and FAs will need to:
- Collect data from various (new) data sources including (but not limited to): data providers with data on company level, financial product level, entity level as well as data from fund administrators, fund management companies and proprietary data sources; and
- Formulate and collect textual commentaries and explanations, quite often in multiple languages, on topics like adherence to international standards, engagement policies and a description of policies to identify and prioritise principal adverse sustainability impacts; and
- Map data from various sources into a singular and robust data model for aggregation, calculation and comparability purposes; and
- Perform various data quality checks; and
- Be transparent on the coverage or the availability of data you need to comply with the reporting obligations; and
- Have look-through data for mutual funds and ETFs available; and
- Produce, publish and disseminate raw data, aggregated and normalized data, documents and periodic reports (e.g. the annual report of a mutual fund).
How to get started with the Sustainable Finance Disclosure Regulation?
BIQH is highly specialized in financial market data logistics. Through the BIQH Platform we help and enable our clients, which are asset managers, fund brokers and banks active in the realm of retail investments, with data logistics and data management. The BIQH Platform improves a streamlined reporting process and ensures compliancy with regulations like MiFID II and SFDR. It’s our goal to provide our clients with maximum flexibility no matter the data source and provider of the market data.
In addition, we assist our clients with our extensive knowledge and experiences in relation to client and regulatory reporting processes. Throughout this series of blogposts related to the SFDR regulation we’ll focus on
- The progress of the implementation of this regulation by the EU and the ESAs;
- On the timelines of the SFDR regulation;
- On the stakeholders involved and the reporting obligations it imposes to them; and
- On the (ESG) data requirements and technical aspects of the SFDR regulation.
We’re always open for a chat and we love discussions, especially when it comes to financial market data. Let us know your challenges, questions and uncertainties relating to the SFDR regulation! Please reach out to me via LinkedIn or send me an e-mail at email@example.com.
If you have any questions about our SFDR solutions or fund data flows, please contact:
+31 (0)6 1455 8103