Lynn Woosley is a Senior Director with Treliant. She is a seasoned executive with extensive risk management experience in regulatory compliance, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk in both financial services and regulatory environments.
- Source: eur-lex.europa.eu
Though the Sustainable Finance Disclosure Regulation (SFDR) is an E.U. regulation, it has already affected the U.S. regulatory environment. The Treliant Team features both Environmental, Social, and Governance (ESG) subject matter experts and former U.S. financial regulators with a proven track record of anticipating the scope of legislative changes before they happen. Treliant is here to ensure that your organization, whether European or Domestic, large or small, is ready for these upcoming changes.
What is the SFDR?
The European Commission engaged a multi-faceted strategy to implement the tenets of the Paris Climate Agreement and realize the United Nations’ 2030 Sustainable Development Agenda.
The first step in that strategy? Facilitate increased participation in sustainable investment activity. The second step? Ensure that these sustainable investment offerings are, in fact, sustainable.
To accomplish this second step, the Commission ratified the SFDR. The SFDR specifies what ESG-related information E.U. financial participants must disclose. These mandatory and prescriptive disclosures apply whether or not the regulated firms are ESG-focused or provide ESG-related financial products.
The requirements of the SFDR can be contemplated on two levels: entire organizations and the products they provide. Within each of these levels, the SFDR mandates that regulated firms consider the following two questions: how does the organization or product impact ESG factors (e.g. climate, diversity in the workplace, etc.), and how do these ESG factors in turn affect the organization or product itself?
Once these questions are considered, the liable firms must disclose their answers on their website, prospectuses, and in periodic reports.
Who does the SFDR currently impact in the U.S.?
At first glance, this regulation may not seem relevant to U.S. financial market participants. And while the SFDR does not apply directly to the U.S. financial market, there are instances where U.S.-based firms must comply with it:
- All asset managers that raise money in the E.U., even if they’re headquartered in the U.S.
- Any U.S.-based investment managers that market products to European clients
- S.-based firms that offer funds in Europe
But, if you’ve read the bullets above and thought “Those don’t apply to my organization. I’m in the clear.” You’re wrong. For those U.S.-based firms that are not involved in European financial markets, the SFDR will continue to play a powerful role in shaping the U.S.’s own ESG-related financial regulations.
How is the SFDR influencing the U.S.’s regulatory landscape?
The SFDR is directly molding U.S. ESG-related financial regulations in a number of ways:
- The Biden Administration’s May 20th Executive Order mandates that federal agencies take broad action regarding financial risks stemming from climate change, including implementing “new or revised regulatory standards.”
- The E.O. also requires that the Treasury’s Financial Stability Oversight Council (FSOC) produce a report for the President that will include a discussion of “the necessity of any actions to enhance climate-related disclosures by regulated entities to mitigate climate-related financial risk to the financial system or assets and a recommended implementation plan for taking those actions.”
- The Securities and Exchange Commission (SEC) has already expended a great amount of resources to develop ESG-related disclosure requirements, including reviewing public companies’ climate disclosures and creating a new position of Senior Policy Advisor on Climate and ESG.
- A report published by the Commodity Futures Trading Commission (CFTC) in September 2020 unequivocally stated that “Climate change poses a major risk to the stability of the US financial system and to its ability to sustain the American economy,” and that all U.S. financial regulators “should move urgently and decisively to measure, understand, and address these risks.” Not only this, the CFTC reported that “existing statutes already provide US financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now.”
When taken together, these developments signal not only a federal move to develop additional ESG-related disclosure regulation in the model of the SFDR, but also that financial regulators may already have the authority to address climate-related risk in our financial system.