SFDR
The SFDR introduces mandatory ESG disclosure requirements for asset managers and other financial market participants to achieve more transparency around sustainability risks and impacts. It is closely linked to the EU Taxonomy through the Regulatory Technical Standards (RTS) which describe how to disclose mandatory information from the SFDR, and it is aligned to the EU Taxonomy classification system.
The requirements of the SFDR on asset managers and other financial market participants are defined at both company and product level and should be disclosed through channels such as the company’s website, periodic reports, and pre-contractual documents. Therefore, this constitutes a strategic aspect for companies as these requirements will be integrated throughout various stages of product development.
As the SFDR is constantly evolving, it brings new challenges to companies. Indeed, level 1 RTS is already into force whereas level 2 RTS will be mandatory from January 2023.
EU Corporate Sustainability Due Diligence Directive
The EU Corporate Sustainability Due Diligence Directive requires companies to identify and act on adverse environmental and human rights impacts across their own organization and their entire supply chain. The proposed directive applies to the following companies:
- EU companies with > 500 employees and > €150 million global net turnover
- EU companies operating in high-impact sectors with more than 250 employees and a global net turnover > €40 million
- Non-EU companies that are active in the EU and generate turnover in the EU exceeding the threshold mentioned above
Companies are expected to monitor and optimize their performance in relation to issues such as child labor, exploitation of workers, safe and healthy working conditions, biodiversity loss and pollution, by conducting specific due diligence activities. This directive will be adopted in 2024 and be applicable in 2026 and 2028 depending on the company type.
Conclusion
The EU has made it clear through its increasing regulatory requirements that sustainability should be at the forefront of a business strategy. This evolving regulatory landscape, together with shifting stakeholder expectations and pressure from investors, means that companies need to tackle these requirements in the right way. Concepts such as ’double materiality‘, with both ’impact materiality‘ and ’financial materiality‘ can help companies prepare for an efficient implementation.
EY has developed tools to help companies identify and gather ESG KPIs, manage ESG risks, set up policies, and agree on targets for material topics. Moreover, under the CSRD, companies are required to have a statutory auditor such as an independent assurance services provider to provide limited (and in the future even reasonable) assurance on the company’s reports.