Understanding the relationship between the SFDR and the EU Taxonomy
With a complex framework like the European Green Deal, it is important but also hard to keep at pace with the multiple (and interrelated) elements of it. In this blog, we aim to help you understand the relationship between the Sustainable Finance Disclosure Regulation and the EU Taxonomy. With this, we will also try to throw light onto the difference between the SFDR and the EU Taxonomy.
So here, we have captured the information to understand the key differences between the EU Taxonomy and the SFDR, and the relationship between them.
What is the Sustainable Finance Disclosure Regulation?
The SFDR is a set of new EU legislation that covers how sustainability should be tracked and disclosed. It targets financial market participants and financial advisors, including investment firms. It was developed by the EU to improve transparency in the financial market when it comes to sustainability disclosure, and to fight greenwashing.
The scope of the SFDR covers asset managers, financial advisers and insurance providers in the European Union, and those marketing financial products on the EU market. As it is implemented, sustainability reporting will become more standardized across industries. Cherry picking of metrics has been a constant issue, and while the SFDR does not limit what metrics may be tracked and reported on, it does define a minimum mandatory set of metrics that have to be considered.
What is the connection between the EU Taxonomy and the SFDR?
The EU Taxonomy is a framework for measuring sustainability that is a central component of this legislation. The aim of both the EU Taxonomy and the SFDR is to increase transparency when it comes to sustainability claims. Most organizations that fall within the framework SFDR will be required to report on the taxonomy. Read more here for the definition of EU Taxonomy.
The SFDR requires investment funds that raise capital from external investors in the EU to classify their fund as either Article 6, 8 or 9. All financial market participants offering financial products that claim to have ‘sustainable investment’ as their objective (article 9 funds or “dark green” funds) or that “promote social or environmental characteristics” (article 8 funds or “light green funds”), will be required to assess and report their portfolio alignment with the EU Taxonomy.
While Article 6 funds do not consider sustainability and will have limited reporting requirements, classifying a fund as Article 8 or 9 comes with a set of pre-contractual and period reporting requirements.
What are the challenges of SFDR and EU Taxonomy reporting?
With the introduction of the SFDR, the biggest challenge for investment funds may be the requirement to regularly assess and disclose fund EU Taxonomy alignment, which is a 0-100% score based on the portfolio companies’ results. An EU Taxonomy assessment requires matching the portfolio companies with one or more economic activities from the EU Taxonomy and assessing their compliance with the activity-specific criteria. Finally, the portfolio company results are aggregated in order to get the fund performance.
Additionally, the SFDR may require reporting on sustainability KPIs (Principle Adverse Impact indicators) and will require reporting on how sustainability is considered and worked in the fund.
How can Celsia help me?
Celsia keeps you up to date with the ever-changing regulations on sustainability reporting and helps you navigate through SFDR and EU Taxonomy reporting. Through the following steps, the Celsia scoring software for the EU Taxonomy lets investment firms configure their SFDR reporting, collect data from their portfolio companies, and report in accordance with the SFDR:
1. Select the appropriate PAI indicators for your portfolio (Celsia & investor)
2. Screen portfolio companies for eligibility with the EU Taxonomy (Celsia & investor)
3. Match companies with relevant EU Taxonomy activity (Celsia & portfolio company)
4. Upload data on PAI indicators and EU Taxonomy performance (portfolio company)
5. Aggregate fund results (Celsia)
6. Report results on website and in periodic disclosures (Celsia)
Write to us at email@example.com to get started on your sustainability reporting journey!
ESG reporting: necessary reporting standards and requirements
Read this blog to know about different ESG reporting standards in the EU.
Principal Adverse Impact (PAI) indicators in SFDR
Read this blog to understand PAI indicators in relation to SFDR.