Unpacking Sustainable Finance Disclosure Regulation

What is SFDR?

The SFDR is a European Union (EU) regulation designed to accelerate flows of finance to sustainable investments, level the playing field, increase transparency in relation to sustainability risks, and reduce the potential for greenwashing of investment products. It is already having a significant impact on asset managers in the EU and around the world. Find out how asset managers are managing the implementation of SFDR and the related impact on their investment strategies and operations in this new report from KPMG International.

Why the SFDR matters?

SFDR is designed to create transparency and trust in financial markets by setting clear rules and requirements related to sustainable investment disclosures for asset managers and financial market participants. It is part of the European Commission’s Action Plan for Sustainable Finance, and it aims to help redirect capital flows towards sustainable activities. As such, its influence on asset managers with funds in, or marketed into, the EU is significant.

The state of the market

Market data suggests that activity around sustainable funds is growing. As of December 2023¹.

US$5.62 trillion in AUM was linked to either Article 8 or 9 funds.
47.4 percent of funds reported being classified as either Article 8 or 9 funds.
Article 8 funds represented 55.5 percent of market AUM and Article 9 represented 3.5 percent.

¹Report title: SFDR Article 8 and Article 9 Funds: Q4 2023 in review
Source: Morningstar Inc. website, United Kingdom, (December 2023)

For asset managers with funds in or marketed to the EU, the SFDR requires decisive action and organizational change supported by a clearly defined investment strategy and approach to sustainability.

Explore our survey data and get the latest insights on SFDR in this new report by KPMG International.

Unpacking Sustainable Finance Disclosure Regulation

This report looks to identify the current state of the market with respect to SFDR implementation.

Download

How is it impacting asset managers?

In KPMG International’s survey of 100 asset managers and financial market participants, 47 percent of respondents report that SFDR has had a positive impact on their firm, with the strongest benefits arising from the increased transparency they are achieving in their reporting across the firm.

● Low Benefit

● Some Benefit

● Strong Benefit

Streamlined ESG Data processes across the firm

2%

29%

69%

Greater buy in across the firm for ESG

4.5%

22%

73.5%

Increased transparency in reporting across the firm

4%

16%

80%

According to our survey, asset managers have also experienced a markable increase in demand for Article 8 and Article 9 funds. Managers in the Europe, Middle East and Africa (EMA) region were the most likely to report increased demand (91 percent) and those in North America the least likely (59 percent), reflecting the investment criteria and allocation requirements of regional investors.

Many PE managers are still trying to determine what ESG metrics make the most sense for their investments. The challenge is to find well-defined metrics that can be monitored and reported. Those with a portfolio of diversified investments will need to take a more holistic approach.

Glenn Mincey

Global Head of Private Equity

KPMG International

Five "no-regret actions"

The report outlines five “no-regret actions” that asset managers can take to help improve maturity and enhance agility.

At a firm level, this should include policies that confirm SFDR compliance is being measured and managed to ascertain it remains comprehensive and effective. Definitions should be clear to help ensure that employees understand what is included and what is not. Core policies may include an Investment Policy, a Stewardship and Engagement Policy and an Escalation and Divestment policy.

As reporting requirements increase, many asset managers are investing in additional data, improving systems and the supporting infrastructure. It is important to build flexibility into the systems and infrastructure to avoid technical debt and allow for further changes in regulatory requirements.

Good governance — at the firm, fund and investment level — can be critical. Make sure you have allocated clear roles and responsibilities for SFDR implementation and address any capability or capacity gaps. Effective governance and reporting can help stakeholders, including fund boards, have a clear understanding of their roles and responsibilities.

Invest in education to promote the understanding of the long-term value case for ESG, with a focus on the implications and impact of sustainability and climate risk on portfolios and funds, including the potential value creation opportunities it presents. Build consensus across the firm on the importance of robust sustainability reporting.

Firms and asset managers should maintain a strong understanding of the current and future regulatory requirements, their strategic implications, the obligations and the points of divergence and synergy across jurisdictions. Asset managers should focus on being proactive and strategic in their action, rather than reactive to individual pieces of regulation. The shift towards sustainable investing opens creates new commercial opportunities for asset managers, from developing new funds to investing in emerging sectors of the economy.

SFDR is already helping to increase investment flows into sustainable activities in Europe and around the world. It is also creating increased transparency and awareness about sustainable investments, their impact and their returns. Asset managers will want to fully assess the impact of SFDR on their strategy and operations.

Andrew Weir

Global Head of Asset Management and Real Estate

KPMG International

How KPMG can help

KPMG’s global network of asset management and sustainable finance professionals is well positioned to help organizations turn regulatory change into growth opportunity.

KPMG teams take a holistic view of SFDR, integrating viewpoints gained from working with investors, managers, regulators and service providers to help clients make informed decisions that can drive their business forward in times of uncertainty.

Methodology

About the KPMG 2023 SFDR Market Assessment

This survey, conducted with 100 private equity, wealth and asset managers between 31 July and 22 August 2023, provides an insight into the current state of the private equity, wealth and asset management market with respect to the SFDR implementation and gauges the sustainable investment ambitions of firms globally. Respondents were captured across a variety of company sizes, with more than three-fourths of respondents representing firms greater than US$1 billion in Assets Under Management (AUM). The survey included decision makers from eight markets (Australia, Canada, China, France, Germany, Japan, the UK, and US) within wealth and asset management and private equity. The SFDR research involved 53 C-suite level respondents, with wealth and asset management being the largest financial sub-sector represented.