The relationships between SFDR, NFRD and EU Taxonomy

This article is written by Maia Godemer, Sustainable Finance Analyst at BloombergNEF.

The three key EU regulations on sustainability disclosure, the EU Taxonomy, the Sustainable Finance Disclosure Regulation and the Non-Financial Reporting Directive, are all relevant for sustainability disclosure but have some overlaps, explained here.

In short, the Taxonomy is a “green share” disclosure regulation that applies to companies and asset managers in scope for SFDR and NFRD. SFDR and NFDR are focused on capturing and mitigating sustainability risks.

Sustainable Finance Disclosure Regulation (SFDR)

Scope:

Asset managers, financial advisers and insurance providers in the European Union.

All asset managers?

Yes, all asset managers and financial advisers are in scope. SFDR has some mandatory disclosures –even for asset managers and financial advisers that do not promote any ESG or sustainability products or services.  Nevertheless, additional disclosures will be required for financial products that claim to have an ESG focus.

What is requested from them?

• How market participants are assessing not only the sustainability risks that could negatively impact their financial returns, but also how their investments could adversely impact sustainability factors –the negative impact of investments on environment and social factors. This is called the “double materiality” of sustainability.
• Statement on due diligence of sustainability risks, integration of sustainability factors in the remuneration policies.
• Measurement of the adverse sustainability impacts at the entity level as well as product level: asset managers should report a number of data points called “Principal Adverse sustainability Impacts” (PAIs).

On February 4, 2021, the European Supervisory Authorities (ESAs) published their draft regulatory technical standards that list all the details of implementation of the regulation as well as the list of the mandatory and optional Principal Adverse Impacts that will have to be disclosed under SFDR. The first elements of disclosure are required since March 10, 2021, with further detail from 2022.On March 2021, the ESAs proposed to merge some of the EU Taxonomy and SFDR disclosures for the financial products covered by both regulations.

Non-Financial Reporting Directive (NFRD)

Scope:

European listed and large public-interest companies with more than 500 employees and that have either a balance sheet total of more than 20 million euros or a net turnover of more than 40 million euros. Also applies to financials.

What is requested from them?

Under the current version of the directive, companies have to publish reports on the policies they implement in relation to:

• Environmental protection,
• Social responsibility and treatment of employees,
• Respect for human rights,
• Anti-corruption and bribery,
• Diversity on company boards (in terms of age, gender, educational and professional background).

The directive gives flexibility on how to disclose this information. They mention some non-binding guidelines. As of March 2021 there is no disclosure related to the EU Taxonomy required under NFRD, but this could change with the revision of the regulation that is expected for the first half of 2021.

EU Taxonomy for Sustainable Activities

Scope:

• Companies in scope for NFRD,
• Financial participants in scope for SFDR that on the financial products they sell which promote environmental characteristics (eg. ESG or sustainable funds).

What is requested from them?

• Companies and asset managers will have to report the percentage of their turnover, capital expenditures and operational expenditures aligned with the EU taxonomy,
• Asset Managers will have to report the percentage of their portfolio invested in activities aligned with the EU taxonomy.

This note is part of a series of research reports around EU Taxonomy and related sustainable finance regulations, available to BloombergNEF clients on web or via the Bloomberg Terminal.