A few weeks ago, the EU Commission hosted the webinar “The Sustainable Finance Disclosure Regulation – What is next?”. Polls were conducted during the session, in which attendees were asked to complete the following sentence: “SFRD disclosures have…”. To this 66% of people responded “… created more confusion than clarity, raising the risk of green washing”.
The outcome of the recently concluded SFDR consultation remains uncertain, but there is anticipation of alignment with the CSRD and revisions to the product categories. As we await developments, we believe it is logical to aim for sustainability reporting to possess the same quality, processes, and documentation as financial reporting. In this article, we attempt to explore lessons learned in 2023, and in subsequent posts over the next weeks, tackle solutions for the challenges associated with SFDR, CSRD and ESG/Sustainability reporting in general.
Early efforts yield significant benefits
Whether influenced by regulatory requirements or not, embarking on the process early pays off. Regardless of if its pressure from regulators, from investors or a future consideration of an ESG/sustainability strategy, having comprehensive data ensures a clearer perspective and a smoother initiation.
Moreover, early action prevents overwhelming your underlying fund managers or portfolio companies, allowing for a thorough understanding, and addressing of knowledge and data gaps. For fund managers contemplating the adoption of a more sustainable strategy in the upcoming years or seeking to classify as an article 8 or 9 fund, having readily available data streamlines the process. This not only facilitates the completion of pre-contractual disclosures but also instils confidence that the commitments made to investors and stakeholders are realistic and achievable. Even for those currently unconcerned with regulatory disclosures, having data on hand simplifies the formulation of a methodology and a clear ESG or sustainable strategy, providing a solid foundation for the future.
Effective data management is essential
Understanding the volume of data required by the SFDR regulation or by a specific ESG framework can be dauting. Utilizing a suitable platform with structured data management from the outset not only aids in organizing data and processes but also alleviates the overall workload.
Structured data management is not only a practical organizational tool but also a means to mitigate the risk of greenwashing. Reputational risk is intricately tied to the level of ESG ambition. With robust data management, confidence in alignment between your ambition, that of stakeholders, and regulatory requirements is enhanced. Additionally, technology-driven data management, from sourcing to final reporting, can serve as a solution that streamlines the future of audits and data governance.
Perfection is an unrealistic expectation (for now)
Expanding on the above aspect of the overwhelming volume of data, it’s crucial for all stakeholders, including regulators, to maintain a sense of realism. Achieving a perfect picture from the outset is an unrealistic goal. Building a meaningful data cube takes time, and as demonstrated in the EU Commission workshop, confusion and mistakes are inevitable in the process.
Moreover, the tangible outcomes of the recent SFDR consultation are likely to take several years to materialize. This provides an opportunity to define and implement an ESG operating model tailored to a specific strategy, both at the product and entity levels. While comprehensive data coverage may not be attainable at this point, transparency in your journey is not only highly recommended, but also expected.
Transparency and communication are crucial
When using regulation as a foundation for embarking on an ESG and sustainability journey, it’s essential to recall the primary objective of the EU Commission in formulating the SFDR – transparency. This emphasis on transparency was reiterated in the EU Commission workshop by Mairead McGuinness, European Commissioner for Financial Stability, Financial Services, and the Capital Markets Union. She underscored that the SFDR was intended to promote transparency rather than function as a labelling scheme, which, she noted, was not the original intent. This serves as a reminder that there is flexibility in defining what aligns with your strategy.
For those aiming to classify a product according to current SFDR definitions, adhering to the provided templates and clarifications goes a long way. Communicating your challenges and being transparent about data gaps is crucial. Additionally, formulating a plan to address these challenges, understanding the expectations and requirements not only from regulations but also from investors and stakeholders, puts you on the right path. The key is to communicate effectively early on with the stakeholders that are most impacted by the regulation.