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The SFDR: the game according to new rules

Climate change: a trigger for new legislation

The EU recently drafted a lot of new legislation to deal with the global threat of climate change. 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 investing in this sector. This explicitly includes investments in real estate because, in the eyes of the EU, the real estate sector can also contribute significantly 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, meaning it 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 on sustainability. In short, 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. Those obligations, incidentally, are more extensive for FMPs than for FAs.

First and foremost, the reports must be issued at the entity level; that is, how does the firm meet 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 must provide information on their investment recommendations. Further, these parties must provide information on the extent to which sustainability risks are part of their compensation policies. Finally, they should publish an entity-level statement on whether they consider the principal adverse impacts 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 designated as "dark green" (if a product has a sustainable investment as its goal), "light green" (if the financial product promotes, among other things, ecological or social characteristics or a combination thereof) or as "grey" (when sustainability is not promoted). Each of these categories, in turn, comes with specific information requirements. This information must be provided pre-contractually. In addition, in some instances, periodic reporting is also required.

The aim is for the end investor to have better information when purchasing a financial product.

The SFDR: obligations now and in the near future

The SFDR entered into force on December 29, 2019, and is being phased in. Since March 10, 2021, the main (general) provisions apply, and the SFDR thus imposes ESG disclosure obligations on FMPs and FAs. It is now common to refer to these as level 1 obligations. After being delayed twice, the more detailed disclosure requirements (called Regulatory Technical Standards or RTS) will most likely apply from January 1, 2023. These RTS are referred to as level 2.

Applications of the SFDR: a complex puzzle

The RTS mentioned above are currently (January 2022) available only in draft form. These should provide the necessary explanations for 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 qualifies as environmentally sustainable. This is to determine the extent to which an investment is ecologically sustainable.

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

Not all dates are available to meet the disclosure requirements of the SFDR.

A call for action!

Anyone who invests in real estate is not necessarily an FMP. The SFDR defines when a real estate investor is considered an FMP and thus 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 two indicators are a) preventing exposure to fossil fuels and b) preventing inefficient energy facilities in buildings.

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

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

BBI is the apparent party to provide real estate investors with more detailed insight into which requirements of the SFDR and the TR they need to comply with. This can be done through workshops, webinars or information sessions in which we guide involved parties through the labyrinth of requirements. In addition, BBI can educate market participants about what is in store in the legislative arena shortly and what may be relevant to them, such as:

  • What role do SFDR, ESG, and GRESB reports play?

  • What is the consistency/overflow between the 3?

  • How to determine if your company is required to prepare an SFDR report.

  • What requirements must you meet?

  • What added value does SFDR reporting have for your investment, portfolio, organization and people?

  • What role do High Performance / smart and data-driven buildings play now and in the future?

Want to know more? Request our SFDR and/or ESG in-company training or make a personal appointment.


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