Turn SFDR to your advantage for sustainable and investible real estate
New regulations are excellent opportunities to prove transparency and compliance to investors interested in sustainable assets. We ask sustainability consultants Kris Kolenc and Karolina Krzystek-De Ranter how financial market participants can turn SFDR into a competitive advantage to secure a strong position in sustainable finance.
Hi Kris, what is the EU Sustainable Finance Disclosure Regulation (SFDR)?
Adopted by the European Union in March 2021, the EU Sustainable Finance Disclosure Regulation (SFDR) presents a unique opportunity for financial market participants (FMPs) – investment managers and asset managers – to chart new courses towards a more sustainable economic future. The SFDR encourages FMPs to disclose investment-grade data, promote environmental and/or social characteristics, and communicate transparent sustainable investment objectives. In turn, this will enable them to prove strong sustainability performance for their funds, and differentiate themselves from competitors.
Embracing a robust SFDR approach fosters trust and credibility with investors pursuing evidence-based resilient green investment assets. The EU’s regulatory helm also sets precedent other jurisdictions are certain to follow. For example, to clamp down on greenwashing in the UK, the Financial Conduct Authority recently proposed a package of measures – the Sustainability Disclosure Requirements (SDR) – to introduce investment product sustainability labels, as well as more restricted use of sustainability-related terms, such as ‘ESG’, ‘green’, or ‘sustainable’. The SDR also establishes new sustainability reporting rules for UK-registered funds and FCA-regulated asset managers.
Hi Karolina, how can funds follow SFDR and highlight sustainability commitments?
To display their commitment to sustainable investing, and environmental and social responsibility, funds must adhere to the guidelines outlined in the Regulatory Technical Standards (RTS) for alignment and disclosure. This affects financial products falling under Article 6 (i.e., funds that disclose their exposure to sustainability risks), Article 8 (i.e., funds that promote environmental and/or social characteristics), and Article 9 (i.e., funds that have at least one sustainable investment objective – the most demanding category).
Kris, when is SFDR reporting mandatory for FMPs?
The disclosure requirements for SFDR came into force on 1 January 2023 with SFDR Level 2 requirements set out in Regulatory Technical Standards (RTSs). The first Principal Adverse Impact (PAI) reporting deadline is on 30 June. SFDR defines PAIs as the most significant negative impacts of investment decisions on sustainability factors relating to environmental, social and employee matters, respect for human rights, anticorruption, and antibribery matters. Funds in scope will need to put in place effective processes for the collection and aggregation of high-quality ESG data, plus streamlined data flows across their properties, now to deliver credible and comparative sustainability reporting in time for this summer.
Karolina, how can businesses resolve sustainability risks and impacts to keep and attract investment
This shift towards sustainability could lead to changes in how assets are managed, including improvements in energy-saving, employee wellbeing, and transparent corporate governance. Transparency and clarity will increasingly steer FMPs towards low-risk investments transitioning towards more sustainable practices. The focus of the SFDR is to force the in-scope funds to consider sustainability risks they are exposed to and best ways of promoting sustainability through their investments to showcase, through their disclosures, how serious they are in their commitments.
Kris, how can businesses develop sustainability metrics and reporting to competitively position assets
One possible outcome of SFDR and its implementation could be an increased focus on sustainable building practices, quality of energy and emissions data, and the development of new sustainability metrics and reporting practices within the real estate sector. As FMPs begin to assess and disclose the sustainability risks to their investments, it could lead to greater demand for assets that are designed, constructed, and operated in more sustainable ways. In turn, this should drive even more sustainable practices, such as energy-efficient building design, construction and operation, water conservation measures, biodiversity, and sustainable waste management
Karolina, how does the EU Taxonomy Regulation fit into SFDR?
The EU Taxonomy Regulation (EU TR) framework adds another level of transparency and standardisation to SFDR. This is to encourage greater capital flows into sustainable finance and green projects. To qualify as EU Taxonomy-aligned, funds must contribute towards at least one of six environmentally sustainable objectives, not cause significant harm to any of the other five objectives and meet minimum safeguards. The six sustainable objectives of choice are: mitigate climate change, adapt to climate change, use water and marine resources sustainably, transition to a circular economy, prevent and control pollution, or protect and restore biodiversity and ecosystems.
Achieving alignment with EU Taxonomy can be a challenging task for the real estate sector, however an increasing number of FMPs are striving to do so. Some have already accomplished this feat, proving it’s possible!
Kris and Karolina, what are your foresights for SFDR?
- Although aligning investments with SFDR Articles 8 or 9 is voluntary, it’s a crucial step to attract institutional and sustainability-focused investors. Instead of simply meeting the minimum Article 6 requirement, aim higher to gain a competitive advantage and differentiate yourself from your peers.
- As climate-related risks rise in prominence, it’s vital to proactively collect and analyse high-quality data on ESG factors. Implement a robust ESG data collection, tracking, and reporting software system, like SIERA, to transparently disclose your progress to investors, as mandated by SFDR. Not only does this show your commitment to sustainability, but it also provides prospective and existing investors with a clear understanding of your fund’s sustainable performance.
- Set sustainability ambitions and monitor how well your assets and funds are performing, and where they need improving to realise the true potential of your financial investments.
By doing so, you will navigate the ever-evolving landscape of climate risk and disclosures, whatever the future holds.
How can EVORA Global’s sustainability consultants support businesses navigating SFDR?
Since the adoption of SFDR, we’ve been busy advising real estate funds with various investment strategies, ranging from commercial and residential real estate equity investments, through real estate investee companies and provision of real estate debt. Our team defines SFDR alignment characteristics, and prepares contractual and internal documents, reporting templates, and disclosures. Our extensive expertise in this arena means we’re well placed to advise on complex funds with diverse asset types and categories.
To stay ahead of SFDR for real estate funds, you also join EVORA Global and the Urban Land Institute (ULI) for an informative webinar discussing SFDR for non-EU funds and fund managers on 23 February 2023. Our executive director, Ed Gabbitas, associate director Aoife Busher, and ULI’s senior director, Kara Kokernak, will be sharing valuable insights on how to navigate SFDR challenges, incorporate new disclosure requirements, and develop strategies to gain a competitive advantage in this fast-evolving sustainable finance landscape. Register now to secure your spot. And, in the meantime, check out our brand-new SFDR web page and downloadable eGuide for added support.
Find out how to future-proof your position as a visionary FMP in sustainable investments. Get in touch with our expert sustainability consultancy team to make the most of SFDR.