One year on from SFDR: how have ESG reporting demands changed?

In this article Will Wilson, ESG Assistant Vice President at Climate Lead, discusses some of the changes to reporting in the last year.

Thursday 10 March marks the one-year anniversary of the introduction the EU Sustainable Finance Disclosure Regulation (SFDR) – widely heralded as a ‘game-changing’ piece of ESG reporting legislation. In this blog we consider how prepared – or unprepared – boards are for the increasing demands as the SFDR reporting burden continues to ratchet up? While the SFDR has had an impact since its implementation last year, boards should now be looking ahead to the more demanding requirements yet to be introduced following significant delays. Many boards and company secretaries have underestimated the workload to comply with disclosure requirements and the associated attention from external stakeholders that these disclosures bring.

Many boards were lulled into a false sense of security by the relatively simple level 1 reporting requirements of the SFDR that are currently live. The requirements brought in on 10 March 2021 were more qualitative and general than those of the more detailed level 2 requirements – the principle adverse impacts reporting (PAI) that comprises the quantitative regulatory technical standards (RTS).

The roll-out of the SFDR has not been without its challenges. The level 2 disclosure deadlines have been repeatedly delayed as the EU tries to finalise the more technical areas of reporting. Rather than use that additional time to set in place effective processes for compliance with the regulation, many boards have delayed their preparations. 

Unfortunately for those companies who have only done the bare minimum, scrutiny on their disclosures is now increasing as the market gears up for the implementation of level 2 in mid-2022 (with the first quantitative reports due by 30 June 2023). This should serve as a warning signal – now is the last chance for any that have not started collecting the requisite RTS data to do so.

Many boards are still overwhelmed with the scale of the data-sourcing challenge. The need for an efficient and accurate software solution to assist in data collection and verification has become clear. For managers with very large and complex businesses or portfolios and smaller companies alike, manual data collection will not ensure compliance. There will not be time or resources for managers to manually perform the ongoing data collection and reporting tasks.

While mapping out the process for ensuring compliance with the level 2 disclosures of the SFDR, firms must also engage with the demands of the EU taxonomy. The job of combining the SFDR and taxonomy compliance should be made slightly easier moving forwards, as it appears that the EU is on track for its goal of establishing a single rulebook for sustainability disclosures under the SFDR and the Taxonomy Regulation. The benefits of greater the harmonisation between the two regulations are clear.

Beyond the reputational damage of non-compliance with the SFDR, there are no formal penalties. The EU will likely not bring in any formal sanctions until the level 2 reporting is live since it will be easier to police non-compliance against the RTS (once they are finally confirmed). One of the EU regulators has said they would consider SFDR non-compliance as a breach of marketing guidelines, i.e. ensuring that all marketing materials are clear, fair and not misleading.

Despite delays and some confusion, the SFDR has already succeeded in kerbing green-washing and purpose-washing and is the global pioneer of ESG-based regulation for the financial markets. We believe that boards and governance professionals should view the regulation as a standardised way to report the positive impact of fund managers rather than yet another reporting burden.

Will Wilson, ESG Assistant Vice President and Climate Lead at Apex Group

ESG has become a focal point of stakeholder scrutiny and are holding organisations to account for their environmental and social impacts. This shift in power makes it even more important for organisations to ensure their organisational purposes and values are in line with expectations.

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