Over the past two decades, sustainable investing has grown from a specialist investment topic into a mainstream concern at the top of investors’ agendas. Driven notably by the recognition that consideration of ESG factors can lead to more comprehensive risk management and help in the identification of pockets of growth, investor demand for sustainable investment strategies has grown substantially and been met by a large supply of financial products. To support financial flows into sustainable activities, while also setting standards for the ever-growing number of sustainable investment products, the European Union has developed a set of directives and regulatory standards.
Amongst these, the Sustainable Finance Disclosure Regulation (SFDR) was introduced to increase and harmonize the disclosures made by financial market participants in regard to their investment products and their own operations, thus supporting their transparency and making it easier for investors to understand, evaluate and compare products.
The implementation of SFDR took place in several phases:
- Level 1 of SFDR came into force in March 2021 and set out the regulation’s principles and broad guidelines.
- SFDR Level 2, the Regulatory Technical Standards (RTS), was introduced in June 2022 and came into force in January 2023. These RTS included more granular disclosure requirements, including the Principle Adverse Impacts (PAIs), as well as and guidance on implementation.
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