Sustainable Finance Disclosure Regulation (SFDR)
Create impact by doing.
Anticipate on the new EU regulation
Ranges from data research to full portfolio manager support.
Creating portfolio-specific ESG information.
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our service: SFDR compliance
We create the right data to meet the new disclosure requirements of the Sustainable Financial Disclosure Regulation. This data is developed with sustainability quantification methods at the portfolio companies. In addition, we ensure these companies directly comply with the Corporate Sustainability Reporting Directive (CSRD) killing two birds with one stone.
chief environmental compliance
APPROACH: Create SFDR relevant data
- We collect the necessary scope 1, 2 and 3 data for SFDR compliance from your portfolio companies, literature studies and databases. Depending on your needs we focus solely on the environmental data, or take care of social and governance data as well.
- We calculate, monitor and store the data in our environmental management tool. The company, private equity and potential auditors can review the data in their own account in this tool.
- We summarise the necessary datasets for your SFDR disclosures. Or we take care of the reporting part and make sure you don’t have to bat an eye.
- Optionally we can assist with ‘real’ sustainable portfolio management. Meaning we go beyond solely compliance but create sustainable portfolio’s that actively decrease environmental impact of the companies that are part of the portfolio. This means that you, as a portfolio managers, make real impact.
Why our SFDR compliance service?
To meet the future requirements of the SFDR, business data must be created that is currently unavailable or incomplete. Current ESG analyses do not meet the requirements set by the SFDR (see box 1). The SFDR demands bottom-up data representing the actual, direct emissions of a company.
The focus therefore shifts from outside-in to inside-out; the environmental impact that a company has on its environment becomes increasingly important. While in the ‘traditional’ ESG rating this is just a part of the E-score. The rest of the E-score is determined by climate change risk factors on the company.
Box 1. Calculating the CO2-footprint for SFDR compliance
The formula below shows how the CO2-footprint should be calculated. We calculate direct, company-specific scope 1, 2, and 3 information for your entire portfolio. ESG methods calculate carbon intensity based on sector specific and regional averages emissions data. This is not compliant with SFDR.
View the entire Regulatory Technical Standards document here.
Aim of the SFDR
The Sustainable Finance Disclosure Regulation (SFDR) has been in force since March 10, 2021. This regulation contains new requirements for the disclosure of sustainability (ESG factors) in the financial sector. The aim of the regulation is to provide investors with more insight into sustainability risks and to make it easier to compare the sustainability of financial products.
The financial sector is struggling to implement the SFDR because:
- The definition of sustainability is unclear. The SFDR includes three categories for reporting ESG: ecological or social characteristics under Article 8; sustainable investments under Article 9; and a category relating to funds without sustainability features. SFDR is now becoming a kind of ranking of sustainability, while that is not its intention.
- Current ESG rating companies have major differences in their methodologies. The E (environment) calculation method is also not sufficient for the new legislation at any of the rating companies, see box 1.
- Companies do not yet have the relevant data available because they do not have to report it yet. This is coming into effect under the CSRD in a later stage. This is difficult for investors. However, they have to take responsibility to ensure that the data is correct, according to the AFM and AMF.
The parties that currently create the data for financial service providers are so-called ESG data providers. However, the problem is that this data comes from general sources through big-data research. This means that when a company opts for sustainability, this is not included in the ESG data. After all, this data is based on, for example, an economic sector, in combination with the production region and the turnover. This inherently means that the investor cannot have data that shows what the direct climate risks are as a result of his investment.
This is the second of a series of three blogs on the sustainable finance disclosure regulation (SFDR) for private equity, venture capitalists and any other
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