Highlight 5/2021 – Transparency in Sustainable Finance
Takhmina Nasimova, 25 February 2021
Sustainable Finance generally refers to the process of considering the environmental, social, and governance (ESG) aspects when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects. Lately, sustainable finance has been one of the main topics among investors and government officials. As a turning point, the Sustainable Finance Disclosure Regulation was adopted in November 2019 as part of the European Commission’s ambition to promote sustainable investment across the EU.
The main purpose of the Sustainable Finance Disclosure Regulation (SFDR) is to provide clear disclosure requirements and to ensure transparency on how institutional investors, investment managers and financial advisors consider sustainability risks in their investment decision making and principle adverse impacts of the investments under management. The SFDR will be applied to financial market participants, financial advisers, and financial products whose businesses operate within the European Union.
The Regulation shall apply from 10 March 2021. Many firms and corporations will possibly fall in scope if they do not have the relevant disclosures and policies in place by then. The SFDR sets clear obligations because the financial service sector is considered as an enabler and possible contributor to a sustainable future.
The SFDR allows the EU to set an example as one of the forefront promoters of sustainable finance. Since, until now the financial regulations have required the financial institutions to only focus on the financial risks for clients rather than the sustainability risks. The SFDR pushes leaders of the financial sector to invest wisely and focus on sustainability risks and opportunities. The ESG aspects that are referred to within sustainable finance including but not limited to such matters as climate change, environmental, social, and employee issues, respect for human rights, and anti-corruption and anti-bribery.
No doubt that the financial sector will go through some challenges during incorporating the SFDR requirements into their practices. It will require an integrated approach to address the evolving responsibilities; however, sustainable growth must become inclusive. Businesses and clients must have a clear knowledge of the impact of their financial actions toward the environmental, social, and governance-related risks and opportunities.
The Sustainable Finance Disclosure Regulation is first step toward more transparent, inclusive, and sustainable finance. Let’s hope it will trigger more impact investment and ensure economic growth without a risk to environment, society, and governance.
Takhmina NASIMOVA, Transparency in Sustainable Finance, Highlight 5/2021, available at www.meig.ch
The views expressed in the MEIG Highlights are personal to the author and neither reflect the positions of the MEIG Programme nor those of the University of Geneva.