The Sustainable Finance Disclosure Regulation, or the SFDR for short, was first adopted on the 27th of November 2019. It was envisioned as part of a wider effort of the European Union for the transition to a low‐carbon, more sustainable, resource‐efficient, and circular economy, all in alignment with the Sustainable Development Goals, as set by the 2030 Agenda for Sustainable Development, which was adopted by the UN.
The Regulation concerns itself with transparency in relation to the integration of sustainability risks and the consideration of adverse sustainability impacts, as well as the provision of sustainability‐related information regarding processes and products offered by participants on the financial market (including insurance companies offering insurance‐based investment products, investment firms providing portfolio management, alternative investment fund managers) and financial advisers (like insurance companies advising on insurance-based investment products, or investment firms providing investment advice).
However, due to the complexity of the regulation and the general risk of greenwashing, as well as to increase the overall level of investor protection, the European Commission has published its proposal for the SFDR 2.0, aiming to address the shortcomings of the original regulation.
With the new Proposal, three new types of financial products have been introduced:
- Transition products (products that invest in or contribute to the transition of an undertaking towards sustainability);
- ESG basics (products that integrate sustainability factors in their investment strategy), and;
- Sustainable products (products that invest in sustainable undertakings or aid sustainability)
Each of the above-stated products must achieve a minimum threshold of 70% of investment into relevant objectives, and all three contain mandatory exclusions, as well as predefined strategies.
On the other hand, entity-level disclosures regarding principal adverse impacts and remuneration policies have been removed with the new proposal to reduce the administrative burden on relevant undertakings, with estimates suggesting a 25% reduction.
Lastly, the sustainable investing definition, which has been a source of dispute, has been deleted in its entirety, but its principles are to be upheld with the new product categories and exclusions.
It is expected that the new proposal will be fully implemented sometime in 2028.
Prepared by:
Daniel Vujacic, LL.M. (UW)