Michele Leung, Green Finance Advisor of Friends of the Earth (HK)
EU Sustainable Finance Package is one of the most ambitious legislative plan globally that aims to shift capital flows towards sustainable investment to achieve sustainable and inclusive growth. The impact is not limited to the EU, as investment managers outside the EU may be impacted or wish to follow if they manage European assets. It is also very likely that other jurisdictions are also looking at putting in similar measures in place.
Sustainable Finance Disclosure Regulation (SFDR) is one of the ten points from EU Action Plan, which is clarifying institutional investors and asset management duties. Essentially, its objective is to harmonize ESG disclosure standards, requiring financial market participants to integrate sustainability risk in the investment process and to report on such integration at both the entity and product level. In February 2021, the European Supervisory Authorities released their Final report on draft Regulatory Technical Standards (RTS), providing details on content, methodologies and presentation of disclosures under the SFDR, which included a set of 64 adverse impact indicators, including 18 principal adverse sustainability impact indicators ad 46 additional environmental and social indicators. Based on the draft RTS, financial market participants serving EU investors may be required to make disclosures at an entity level of all of the 18 principal adverse impact indicators , two from additional set of adverse impact indicators (one environmental and one social) and any other indicators used to assess the sustainability impacts.
Re the timelines, principle-based disclosures are required from beginning in March 2021, and then it will be more challenging in Jan 2022 as detailed and prescriptive disclosures (i.e. adverse impact indicators) will be due.
Market participants has raised concerns on the data availability, aggressive timeline and also the inefficiency and cost if to collect data directly from companies. For example, among the required metrics, the disclosure rate is the lowest for gender pay gap, biodiversity and water emissions. They are now seeking for guidance and best practices to start their new journey, many of which are now establishing their dedicated project team and IT structure, while knowing the limit is data availability.
One possible solution is to rely on third party vendors, which in fact, have launched tailored and robust SFDR solutions that help investors to source the data more holistically and to respond both qualitatively and quantitatively. In absence of disclosure, the third party vendors can conduct company outreach, provide estimation and supplementary data to bridge the gap.
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