What Does The EU Sustainable Finance Disclosure Regulation Means For Firms?

We finally live in a world where financial firms are required to exercise full transparency in regards to their approach and efforts towards creating a greater sustainability awareness within the business. Thanks to the EU.

As of 10 March 2021, asset managers and investment firms will be required to disclose various pieces of information that demonstrates their effort to integrate sustainability risks in their decision-making process.

The regulation will apply to financial institutions such as banks, investment firms, asset managers and insurers and it will apply directly to all EU-based entities as well as non-EU based entities, which have EU subsidiaries or provide services within the EEA.

The disclosure-related requirements include but are not limited to the following:

• Details of policies that include the integration of sustainability risks into the investment decision-making process including due diligence.

• Considerations on the Adverse Sustainability Impact on the investment decisions taken by firms...

This type of disclosure is mandatory for large entities and holdings. More importantly, firms need to ensure that they consider any adverse material effects (both actual and potential) not only in relation to climate change and the environment (which is well-hinted by the name of the regulation), but also related to social, employee, human rights, anti-bribery and anti-corruption matters.

• Product Pre-Contractual Disclosure

The above mentioned disclosures will have to also form part of the initial relationship stage and product-related documents that are being disclosed to a client prior to entering into a contractual relationship.

• Product Website Disclosure

Financial institutions will have to publish a number of details in relation to products promoting environmental or social characteristics as well as product with primary sustainable objective. Ultimately, whatever information is included as part of the pre-contractual stage information, will also be published on their websites.

This is a game-changer for both the ESG and financial services sectors. Finally, we have some true color added to the financial services industry! Not only will investment firms be pressured to now consider sustainability and social factors in greater detail, but also their clients and the companies that seek those investments will have to do exactly the same. We have a complete positive ripple effect here and I cannot wait to see the results.

SFRD would allow clients to also consider any sustainability-related risks, due diligence and data before deciding whether to move forward with a product or investment service. I see this as stepping stone for shift of behavior and new way of thinking by investors. Frankly, I think, the shift is already evident. Example, back in late 2019, Amazon finally agreed to disclose its carbon footprint due to shareholders' concern. Same with Starbucks, which committed to reduce plastic and to use sustainable materials due to shareholders' pressure. SFDR is just formalization and recognition of ''the new normal'' that has been long overdue.

I am attending a few seminars and training on SFRD and will be sharing more insights soon!

Bee Kind

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