The EU’s Action Plan on Sustainable Finance has, since 2016, pursued the implementation of regulatory measures aimed at introducing market standards and legal obligations in the field of sustainable finance.

The “Sustainable Finance Disclosure Regulation” (“SFDR”), adopted in 2019, is supplemented by the EU’s Taxonomy Regulation and sets the criteria that need to be met by an economic activity so as to qualify it as an environmentally sustainable investment. ”SFDR” came into force on the 10th of March 2021.

“SFDR” regulation is applicable to financial market participants such as asset managers, including UCITS Management Companies and Alternative Investment Fund Managers, venture capital funds, credit institutions offering portfolio management, pension funds, insurance companies, banks as well as financial advisors whose activity is in Europe. The regulation also applies to non-EU financial participants with business in Europe, including the sale of products to the EU, as well as those who sub-manage EU assets or EU funds.

As at March 10th,2021 financial participants are required to disclose information relating to their firm’s sustainability risk policy. The aim is to raise transparency on sustainability among financial market participants, via disclosures to investors, so that capital flows are redirected towards companies with lower greenhouse gas emissions and greater resilience to climate change. The requirements, therefore, relate to the companies themselves as well as to the financial products or services they offer, regardless of whether these are being promoted as sustainable or not. Such disclosures must be made available on the participant’s website as well as in regular reporting to the investor as of January 2022.

Asset managers have the option to choose whether or not to publish a due diligence statement about how decisions on investment activity affect sustainability factors. Such factors include, among others, waste, human rights, biodiversity and GHG emissions that companies need to account for in their investment policies. As part of the due diligence report, firms are also required to disclose information on their “Principal Adverse Impacts” of their investments and how they seek to mitigate such an impact. Despite it being optional at this stage, the due diligence report will become a mandatory reporting tool for large market participants with over 500 employees as of the 30th of June 2021. For smaller asset managers with less than 500 employees, the “comply or explain” principle applies whereby one is not obliged to comply with the particular regulation, however, must explain why.

As part of the “SFDR”, product level transparency includes a 3 -tier categorisation depending on the design and marketing of the product. “Light Green” refers to financial products with environmental or social characteristics, “Dark Green” classification refers to sustainable financials products with an intended sustainability impact. The “other products” category relates to products that are not classified as “Light Green” or “Dark Green”.

In response to the European Commission’s plan to convert the environmental and climate challenges it faces into opportunities, a plethora of crucial regulatory and legislative changes are expected. The latter, coupled by industry-level initiatives, will pave the road for sustainability within the financial services industry.

By, Anna Philiotis, Director Eurofast Taxand Ltd