Keeping up with EU sustainability regulations

The EU is, arguably, the most important region in the world for sustainability regulations. This region has led the way for the rest of the globe with its pioneering frameworks and sustainability reporting methodologies. The EU is home to the world’s best-established sustainability reporting framework: The EU Taxonomy. Accompanying that framework is a specific methodology called the Sustainable Finance Disclosure Regulation, or SFDR.

 

The SFDR was born in 2018, when the European Commission imposed an action plan—Financing Sustainable Growth—that would enable the EU to reach carbon neutrality by 2050. The plan the Commission adopted includes three main objectives: 1) encouraging a shift toward sustainable investment, 2) mitigating the financial risks that result from climate change and social issues, and 3) building transparency and long-term success in financial and economic activity.

As a result of that action plan, asset managers and market participants must now comply with several regulations, including the SFDR. Designed to foster transparency, help investors assess risks, and ultimately encourage the funding that will catalyze a shift to net-zero emissions, the SFDR outlines how financial market participants must disclose sustainability information in a way that promotes sustainable businesses while deterring “greenwashing.” 

 

The SFDR comprises standardized templates, questions and frameworks with which all market participants must comply. SFDR compliance is thus interwoven into a veritable trove of communications, including financial reports, prospectuses, newsletters, quarterly reports, and more. Each of these communications must comply with the SFDR—and do so in multiple languages.

 

“Here’s where it gets a bit technical,” says RWS Project Management Director Iva Angelova. “Funds belong to different articles, and certain articles—typically, articles 6, 8, and 9—have clear sustainability objectives.” Fund managers within these articles need to comply with SFDR content across all their communications and languages, and doing so can be complicated and time-consuming.

 

“When we receive a request to translate SFDR content, our project management team engages with the client, scopes the work, and outlines the timeline,” says Iva. In partnership, financial clients and RWS can maintain compliance without the client’s becoming unduly burdened.

A core challenge with SFDR compliance is its status as a dynamic, frequently-changing regulation. The Financing Sustainable Growth action plan was announced to great fanfare, and market participants worked hard to prepare for alignment and compliance with the framework.

 

Since its launch, though, the SFDR has been subject to constant revisions that have necessitated a near-constant stream of reactive work. “It’s a new regulation that ebbs and changes,” continues Iva. “That is where we can help the most.” For example, a recent change necessitated different translations of the same source text depending on whether a given fund is compliant with article 8 or article 9. RWS instituted a QA check at the very end of the translation process, in which a human reviewer can extract the very tiny changes needed for compliance, which can’t be automated.

 

RWS has a devoted SFDR subject matter expert team whose job is to stay abreast of any forthcoming changes. “We have teams of people who specialise in their working knowledge of the regulations,” says Iva. “When we work with clients, we review how they’ve organized their SFDR content to date, and we immediately start building pipelines.”

The SFDR will continue to expand in the coming years as both the political landscape and the sustainable finance situation evolves, and with that expansion will come a commensurate burden for asset management firms and other market participants. Right now, funds aligned with just a handful of articles need to comply with the SFDR, but that need for compliance will eventually extend to all funds marketed within the EU.

 

As the compliance world grows in scope, asset managers will need to find a partner that can meet the challenge and scale accordingly. At RWS, we’re ready and able to be that partner.

 

Reach out to our team today to learn more about our work helping clients comply with the SFDR and other regulatory frameworks.