Europe launches Sustainable Finance Disclosure Regulation

Europe introduced a regulatory framework for ESG that should push its sustainable finance agenda forward. The SFDR came into effect in March 2021 as a fundamental component of the European Commission’s sustainable finance agenda. The regulation obliges financial asset managers, financial institutions and other actors providing financial services to disclose their approach to ESG considerations during their decision-making processes.

Potential environmental impact

The idea of the regulation is to push investors and asset managers towards considering actual sustainability risk instead of greenwashing.

The main three areas of the SFDR are as follows:

• the integration of sustainability risks in the investment decision-making and advisory process;
• Principle Adverse Impacts (PAIs) of investment decisions on sustainability factors;
• transparency of information for products that either advertise their ESG characteristics (Article 8) or describe themselves as sustainable investments (Article 9).

Scrutiny towards private environmental initiatives is more than warranted, since companies are highly motivated to save profits instead of investing in sustainability.