The SFDR: the game according to new rules

sfdr Feb 09, 2022

Climate change: a trigger for new legislation

In order to deal with the global threat of climate change, the EU has recently drafted a lot of new legislation. In part, these legislative measures focus on the financial sector. The EU wants more weight to be given to ESG (Environmental, Social and Governance) aspects when making investment decisions in this sector. This explicitly includes investments in real estate, because in the eyes of the EU the real estate sector can also contribute greatly to reducing the ecological footprint.

The so-called Sustainable Finance Disclosure Regulation ((EU) 2019/2088), or SFDR for short, is one of the legislative measures that, in its effect, promotes long-term investments in sustainable economic activities and projects. The SFDR is a regulation, which means that this regulation has general application, is binding in all its parts and is directly applicable in every member state.

Being transparent on sustainability: the obligations of the SFDR

The SFDR does not oblige investors to invest sustainably. However, the SFDR does introduce transparency obligations with respect to sustainability. In a nutshell, these obligations apply to all financial market participants (FMPs) and financial advisors (FAs) in the development and distribution chain of financial products with an investment component. These obligations are more extensive for FMPs than for FAs.

First and foremost, reports must be issued at the entity level, i.e.: how is the firm complying with the requirements of the SFDR? For example, at the entity level, FMPs must provide information on their practices in integrating sustainability risks into their investment decisions, and FAs in their investment recommendations. Further, these parties must provide information on the extent to which sustainability risks are part of their remuneration policies. Finally, they should publish an entity-level statement on whether they take into account the main adverse effects of their investment decisions/investment advice on sustainability factors. This information should be published on the website.

However, the reports must also be issued at the product level. Three types of products are distinguished, generally referred to as 'dark green' (if a product has sustainable investment as its objective), 'light green' (if the financial product promotes, among other things, ecological or social characteristics or a combination of these) or as 'gray' (when sustainability is not promoted). All of these categories in turn involve certain information obligations. This information must be provided pre-contractually. In addition, in certain cases, periodic reporting is also required.

The aim of all this is for the end investor to have better information at his disposal when he purchases a financial product.

The SFDR: obligations now and in the near future

The SFDR entered into force on December 29, 2019 and is being implemented in phases. As of March 10, 2021, the main (general) provisions are applicable and the SFDR thus imposes ESG disclosure obligations on FMPs 's and FAs. It is now common to speak of level 1 obligations here. The more detailed disclosure requirements (the so-called Regulatory Technical Standards or RTS), after being postponed twice, will in all likelihood apply from January 1, 2023. These RTS are referred to as level 2.

Applications of the SFDR: a complex puzzle

The aforementioned RTS are currently (January 2022) only available in draft form. They should, in fact, provide the necessary explanation of the generally formulated obligations in the SFDR itself.

The SFDR is intertwined with another regulation, the so-called Taxonomy Regulation ((EU) 2020/85), or TR for short. The TR introduces a classification system to determine whether an economic activity can be classified as environmentally sustainable. This is to determine the extent to which an investment is environmentally sustainable.

The various pieces of legislation are being introduced in stages. It is not always clear how legal terms in one regulation should now be understood in the light of somewhat similar terms in another regulation .

Not all data is available to meet the information requirements of the SFDR.

A call for action!

Those who invest in real estate are not necessarily FMPs. The SFDR defines when a real estate investor is considered an FMP and therefore must comply with ESG disclosure requirements. As for the (draft) RTS, Annex I forces FMPs to report on 18 mandatory indicators, 2 of which relate to real estate investments. These 2 inidactors are: a. Preventing exposure to fossil fuels. b. Preventing inefficient energy facilities in buildings.

Anyway: those who fall under the operation of the SFDR should act now. As things stand, the first reference period runs from January 1, 2022 to December 31, 2022. The report on the first reference period must then be published by June 30, 2023. This means that FMPs and FAs need to act quickly and carefully on aspects such as data collection, aggregation and quality control, performing calculations, report generation etc.

What services can BBI provide regarding the SFDR and the TR?

BBI is the right party to give real estate investors more and detailed insight into which requirements of the SFDR and the TR they have to comply with. This can be done by means of workshops, webinars or information sessions in which we guide involved parties through the labyrinth of requirements. In addition, BBI can inform market parties about what will be happening in the legislative field in the near future and what may be relevant to them, such as:

  • What role do SFDR, ESG and GRESB reports play.
  • What is the relationship / overflow between the 3.
  • How to determine if your company is required to prepare an SFDR report.
  • What requirements do you need to meet.
  • What added value does preparing an SFDR report have for your investment, portfolio, organization and people.
  • What role do High Performance / smart and data driven buildings play now and in the future.

Would you like to know more? Request our SFDR and or ESG in-company training or make a personal appointment with us.

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