The European Union’s Sustainable Financial Disclosure Regulation (SFDR) needs to go much further if the market is serious about tackling climate change, according to Molly Scott Cato, former Green MEP and Professor of Economics and Finance at the University of Roehampton.
The new SFDR introduces various disclosure-related requirements for financial market participants and financial advisors at entity, service and product level.
In essence, it aims to provide more transparency on sustainability within the financial markets in a standardised way, thus preventing so-called ‘greenwashing’ and ensuring comparability cross companies and markets.
The majority of the new disclosure obligations will be applicable as of 10 March 2021.
For example, financial market participants must be provided with information about policies on the integration of sustainability risks into the investment decision-making process, as well as being told how remuneration policies are consistent with the integration of sustainability risks.
According to Professor Cao, however, greater transparency into the environmental impacts of financial products is long overdue, and must go further to protect the climate:
“The significance of the Sustainable Finance Disclosure Regulation (SFDR) coming into force cannot be overstated, and is a very important step forward towards more transparency of the environmental, social and governance (ESG) impacts of investments. This long-overdue regulation will finally allow people who buy pensions and investments to know what their money is being used for and provide them with a better understanding of the impact of their investments on people and the planet.
She added that when people found there was horsemeat rather than beef in their lasagne in 2013 there was an outcry, but when the equivalent happens in the financial sector, as it has for years, customers don’t even have the right to know.
As such, Cao suggested, SFDR will have a big impact, as we should welcome the fact that from 10 March, investment and pension firms will have to expressly disclose the impacts of their investments, thus improving transparency.
“However, the regulation must go further,” she added. “While negotiating the SFDR as shadow rapporteur for the Greens-EFA Group in 2018, I was deeply disappointed that the EU Council allowed a ‘comply or explain’ exemption. This avoids full transparency, since smaller firms can refuse to disclose so long as they give a reason why. However, even in the current form, we cannot deny the regulation’s merits and the fact that it is a clear signal of a shift towards a more transparent and open financial industry.”
Professor Cao also said that the priority for SFDR disclosure is protecting the climate, since rapidly advancing global targets for net zero carbon emission by 2050 mean investments bought today that include fossil fuel assets will simply have no value in a few years’ time”
“People investing their money today are deeply concerned about the environmental and social impacts of the companies their money is entrusted to. SFDR being made a legal requirement will bring much greater transparency into how their money is being invested and its social and environmental impacts.”