06.12.2024
In recent years, the European Union has taken significant steps to establish a sustainable financial system. Central to these efforts is the EU Sustainable Finance Framework, consisting of three key components: the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR). In today's blog article, we will look at the individual components in more detail.
The CSRD introduces an ambitious extension of sustainability reporting obligations compared to the NFRD. From 2025, approximately 49,000 companies - including large enterprises and listed SMEs - will be required to publish detailed reports on their sustainability performance. These reports must address environmental, social, and governance factors (ESG). The directive aims to increase the transparency and comparability of sustainability information, enabling investors and other stakeholders to make informed decisions.
A standout requirement of the CSRD is the double materiality principle. Companies must assess both the impact of their operations on the environment and society, and how sustainability risks and opportunities influence their financial performance. This dual perspective helps stakeholders - including investors, customers, and regulators - to understand both the outward and inward sustainability impacts.
The EU Taxonomy represents a classification system that defines which economic activities can be categorized as environmentally sustainable. It provides precise criteria and thresholds for different sectors to ensure that investment flows into activities that support the transition to a green economy. The taxonomy covers six environmental objectives, including climate change mitigation, adaptation to climate change and the protection of water and marine resources. Under the CSRD, companies must report on their alignment with the EU Taxonomy. This requires detailed data and a careful analysis of their business processes.
The SFDR is pivotal in promoting transparency in the financial sector, requiring financial market participants and financial advisors to disclose how they consider sustainability risks in their investment decision-making processes. This applies to all types of financial products and services. The regulation aims to prevent greenwashing and create transparency, enabling investors to make informed decisions.
The SFDR distinguishes between different levels of disclosure, depending on whether a financial product pursues specific sustainability objectives or not. Financial market participants must also indicate how their products comply with the EU Taxonomy.
In order to adequately reflect sustainability risks, especially for financial products that advertise environmental or social characteristics (so-called "light green products", Article 8 SFDR) or products that aim at sustainable investment (so-called "dark green products", Article 9 SFDR), improving the availability of information is crucial to fulfill the disclosure obligations set out in the SFDR.
The CSRD, EU Taxonomy and SFDR are closely interlinked and form the backbone of the EU Sustainable Finance Framework. Together, they ensure increased transparency and standardization of sustainability information, therefore supporting the transition to a sustainable economy.
CSRD and EU Taxonomy: The CSRD requires companies to report on their sustainability performance, including an assessment and disclosure of their operational alignment with taxonomy-defined sustainability thresholds. This requires detailed data and an analysis of business processes to determine which activities meet the EU Taxonomy's environmental objectives.
SFDR and EU Taxonomy: Financial market participants covered by the SFDR must disclose how their investment decisions take sustainability risks into account and to what extent their financial products comply with the EU Taxonomy. This helps investors make informed decisions by giving them access to clear and comparable information on the sustainability of financial products.
CSRD and SFDR: Expanded ESG data availability under the CSRD enables financial entities to meet SFDR requirements, reducing information gaps and forming the basis for the respective disclosures.
In order to be prepared for the challenges linked to the EU Sustainable Finance Framework, companies can follow certain steps:
The EU Sustainable Finance Framework places rigorous demands on companies but also offers opportunities to lead in sustainability innovation. Proactive compliance with the CSRD, EU Taxonomy, and SFDR enhances competitiveness, builds trust with stakeholders, and supports global sustainability goals.
For further information and assistance, companies can engage with the ESG experts of CoPLIANCE to effectively navigate the evolving regulatory landscapes.
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