The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation that aims to increase transparency in the financial services sector with regard to sustainability. It came into force in March 2021 and requires financial market participants and financial advisors to disclose information on how they incorporate ESG risks into their investment decision-making processes.
Key elements of the SFDR are
- Classification of financial products: The SFDR classifies financial products into three categories based on their sustainability characteristics: Article 6 (unsustainable), Article 8 (light green) and Article 9 (dark green), with sustainability increasing in each case.
- Disclosure requirements: Financial institutions must disclose how sustainability risks are integrated into their investment processes, what potential impact these risks have on returns and how adverse impacts on sustainability are taken into account.
- Pre-contractual information: Companies are required to provide clear information about the environmental and social characteristics of their products in pre-contractual documents so that investors can make informed decisions.
- Periodic reporting: Asset managers must also report regularly on the sustainability performance of their products and provide transparency regarding the fulfillment of their sustainability goals.
The SFDR aims to prevent greenwashing by ensuring that investors receive accurate information on the sustainability of financial products, thereby promoting sustainable investment across the EU.