Key takeaways
Sustainable finance plays a key role in delivering on the objectives of the EU’s Green Deal. That is why the financial market is experiencing a wave of difficult changes regarding collection, management and reporting of sustainability information.
Four main regulations are driving this change (that is why they are considered the gamechangers of the financial market and capital flows): EU Taxonomy, SFDR, CSRD and MiFID II.
In this article, Datia’s Head of Sustainability, Nora Sandahl, explains how these four regulations are strongly interlinked.
Connecting the dots:
With the taxonomy, SFRD and MiFID II in place, investors and the capital market are already in need of sustainability information from various counterparts. This will generate big shifts in information flows - from companies reporting under CSRD, to financial actors consolidating the information regarding their products under SFDR and Taxonomy regulation, who then provide the information to meet investor preferences under MiFID II.
See in the chart below how the information is expected to flow among the different European market participants:
All of these legal frameworks have one thing in common: the requirement for real sustainability performance data. Financial Market Participants (FMPs) need data from corporates to comply with upcoming and present regulation, and corporates need to report relevant data to comply with CSRD.
Another aspect to have in mind is how the growing usage of sustainability information is going to affect the market in the long term, beyond compliance to potentially increasing demand for ESG and sustainability-themed financial products, even affecting the pricing of capital. It is hard to foresee if the four regulations together will be enough to deliver on the EU's high ambitions for sustainable finance - but we recommend not sitting idle for too long.
Here's more detailed explanation about each of the 4 regulations:
EU Taxonomy:
It is perhaps the most notorious of EU’s sustainable finance regulations, with a high degree of complexity. The taxonomy can be described as a tool for investors and companies to classify which economic activities are environmentally sustainable. The purpose of the taxonomy is to navigate the transition to a low-carbon, resilient and resource-efficient economy. It applies to both corporates and financial institutions.
Sustainable Finance Disclosure Regulation (SFDR):
Sustainable Finance Disclosure Regulation (SFDR) is the EU regulation that defines the principles for sustainability‐related disclosures in the financial services sector. It aims to increase transparency from financial institutions regarding the integration of sustainability impacts and risks in the investment process. One of the main documents that FMPs need to produce according to SFDR is the Principal Adverse Impacts (PAI) statement.
Read more about PAI statements in the blog post "Who? When? And how? Your PAI statement questions answered".
Corporate Sustainability Reporting Directive (CSRD):
It replaced a previous regulation called Non-Financial Reporting Directive (NFRD). The long-term ambition with the CSRD is to bring sustainability reporting to the same level as corporate financial reporting. This will mean reliable, comparable and complete sustainability information. Under CSRD, companies are required to report based on a common EU standard for sustainability reporting: the EU Sustainability Reporting Standards (ESRS). They will also need to report information connected to the Principle Adverse Impacts (PAI) as well as eligibility and alignment under the EU taxonomy.
MiFID II:
The MiFID directive has been applicable across the EU since 2007, and is a cornerstone legislation for EU’s financial markets as it ensures a high degree of protection for investors in financial instruments. Starting in August 2022, financial actors under the scope of MiFID need to gather information about their clients’ sustainability preferences in three possible ways:
- Taxonomy alignment (minimum proportion);
- Percentage in sustainable investments as defined by the SFDR; or
- Quantitative or qualitative consideration of Principal Adverse Impact (PAIs) determined by the client or potential client.
In order to assess and provide information to meet preferences, wealth advisors and asset managers need to share data about suitability, e.g. taxonomy alignment, SFDR category, or PAI performance. One of the key tools at advisers’ disposal to help them filter out and choose relevant products based on the preferences expressed by their clients is the European ESG Template (EET). It pulls together all of the ESG data that is useful and required to make sure that distributors can take into account and respond to the regulatory requirements.
Read more about EET in the blog post "Introducing the Version 1.1 of the European ESG Template (EET)"
How Datia can help
Datia enables asset managers, asset owners, and wealth advisors to optimize their sustainable finance process.
At Datia, investors can have access to more than 200 sustainability data points of more than 6 million instruments (covering global companies, mutual funds & ETFs, and governments) with direct links to the sources. With one click, investors can generate complex reports such as SFDR PAI Statement; ESG Fact Sheet; and MiFID II end-client report, as well as save up to 90% of time creating the European ESG Template (EET) files of portfolios.
Reach out to our team of experts to understand how Datia can help your organization comply with SFDR, EU Taxonomy, and MiFID II.
