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SFDR simply explained: What companies need to know

The Sustainable Finance Disclosure Regulation (SFDR) aims to promote transparency and sustainability in the financial sector. But its impact extends far beyond the financial market. Even companies that are not directly active in the financial sector are increasingly feeling the consequences. A key point: banks and financial institutions are demanding detailed ESG information from companies, for example, when granting loans. What does this mean for your company, and how can you prepare?

|  December 2, 2024

🕓 Reading time 10 minutes

Carbon Credits

1. What is the SFDR?

 

The SFDR is an EU regulation that has been in force since March 2021. It requires financial market participants, such as fund providers or asset managers, to provide standardised information on their Environmental, social and governance practices (ESG)The aim is to prevent greenwashing and to enable investors to more easily identify sustainable products.

What is often overlooked is that the SFDR not only affects the financial market, but also has far-reaching indirect consequences for companies in other sectors.

Key points of the SFDR:

  •  Financial products are classified into three categories (Articles 6, 8, and 9) depending on their sustainability focus.
  • Financial market participants must disclose detailed ESG data on their investments.
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2. How does the SFDR affect companies outside the financial sector?

 

Although the SFDR primarily addresses the financial sector, it has significant indirect effects on companies that not directly active in the financial market are.

Banks and financial institutions that fall under the SFDR are required to consider and disclose ESG risks when granting loans or other financial products. This means that they from their business partners – including companies outside the financial sector – always more detailed information about their sustainability practices demand.

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Typical scenarios in which companies are affected:

  • Loan applications: Banks require ESG questionnaires to assess the company’s sustainability.
  • Business relationships: Companies financed by funds or investors must provide ESG data.
  • Supply chain management: Large companies require ESG information from their suppliers to fulfill their own SFDR obligations.

3. Time horizon and consequences of non-reporting

 

The requirements of the SFDR (Sustainable Finance Disclosure Regulation) are will be gradually tightened in the coming years, because the EU has a clear roadmap for implementation.

This has significant implications, particularly for companies outside the financial sector, as they more closely involved in reporting obligations in the medium and long term even if they are not formally directly subject to the SFDR.

An overview of the time horizon

→ March 2021: Introduction of the SFDR with basic transparency obligations for financial market participants and advisors.

→ June 2023: Introduction of the enhanced Regulatory Technical Standards (RTS), which include detailed reporting requirements and clear definitions for sustainable products (Articles 8 and 9).

→ 2024-2025: Further requirements, including standardized data formats and the consideration of sustainability targets at the portfolio and company level, are in place. Companies outside the financial sector must increasingly provide ESG data, as banks require it to fulfill their own SFDR obligations.

 

Consequences for companies if they do not report

Companies that provide no or insufficient ESG data can experience significant disadvantages:

→ Difficulty obtaining credit: Banks classify companies without ESG data as riskier, which leads to worse conditions or rejections.

→ Exclusion from investments: Sustainability-oriented funds and investors prioritize companies with clear ESG data.

→ Loss of reputation: A lack of sustainability transparency can negatively impact customers, partners and the public.

 

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4. Practical example: How are SMEs confronted with the SFDR?

A medium-sized company would like to Loan for the expansion of its production capacities and is confronted with a scenario that is now occurring more and more frequently:

The bank gives a ESG questionnaire in which various Information on sustainability issues requested including the Greenhouse gas balance for Scope 1, 2 and 3. The company has never collected this data before and is now under time pressure and facing significant challenges. The short-term collection of the carbon footprint requires urgent external support, and the loan approval is delayed.

If the company had anticipated the expected requirements made aware of this early on before applying for a loan If it were prepared with ESG data, it could easily meet the requirements. This would not only speed up loan processing but also enable better terms and conditions and strengthen the bank's trust.

This scenario shows the importance of early preparation for ESG reporting, as it is increasingly becoming standard practice and both financial and strategic advantages can offer.

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Sources

Chamber of Commerce and Industry Lake Constance-Upper Swabia – Sustainability reporting for SMEs: Guide for beginners: https://www.ihk.de/bodensee-oberschwaben/innovation/umwelt/klimaschutz-eu-green-deal/nachhaltigkeitsberichterstattung-kmu-leitfaden-fuer-einsteiger-6030074 Accessed on November 29, 2024

IDW – IDW Position Paper: Sustainable Finance – Significant Impact on Credit Institutions: https://www.idw.de/idw/media/press information/idw-position paper-sustainable-finance-significant-effects-on-credit institutions.html Accessed on December 2, 2024

Zebra magazine – Lending: Study shows role of ESG data in the banking sector: https://zebramagazin.de/studie-zeigt-die-rolle-von-esg-daten-im-bankensektor-10237 Accessed on November 29, 2024

Law Code – SFDR: Guide to the Sustainable Finance Disclosure Regulation: https://www.lawcode.eu/blog/sustainable-finance-disclosure-regulation-sfdr Accessed on November 29, 2024

 

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ACTING NOW IS WORTH IT

When it comes to sustainability or ecological viability, climate change and human influence on it are central, as in hardly any other area can environmental impacts be measured and documented so well with figures. The indicator here is anthropogenic emissions, i.e., greenhouse gas emissions caused by humans that contribute to global warming.

What does this mean in the context of sustainable business? Every company should keep its greenhouse gas emissions – which are unavoidable in the provision of business services – as low as possible. Sustainable business cannot be achieved at the push of a button, but a continuous optimization process based on ecological indicators is the crucial approach.

By recording the greenhouse gas emissions generated by your company, product, or service, you can identify potential for emission reduction. This enables you to optimize your processes and also save costs. You communicate to your customers and suppliers that you take responsibility for the emissions for which you are responsible. This allows you to build trust and adapt to the requirements of your business partners.

Acting now is worthwhile

Knowing your emissions will prepare you for predictable, more stringent regulatory requirements, such as increasing greenhouse gas emissions taxes or the mandatory implementation of investment-intensive measures. Incorporating this component into your corporate risk management is essential in the long term.

Due to the ongoing social demand for Climate protection, even the European Central Bank under Christine Lagarde has now taken the inevitable course of giving capital preferential treatment to companies that can demonstrably Climate protection The same trend is evident in the capital flow of large asset managers, such as BlackRock. Their chairman, Larry Fink, wrote in a letter to his CEOs that companies that do not address environmental issues seriously and transparently are no longer viable and will therefore no longer be invested in.

Climate protection Therefore, operating your company professionally and verifiably is inevitable in the near future. If your company is among the first to address this situation, you will establish a pioneering effect that prepares you for the foreseeable legal requirements, results in lower capital costs in the long term, and guarantees market advantages!

ACTING NOW IS WORTH IT

When it comes to sustainability or ecological viability, climate change and human influence on it are central, as in hardly any other area can environmental impacts be measured and documented so well with figures. The indicator here is anthropogenic emissions, i.e., greenhouse gas emissions caused by humans that contribute to global warming.

What does this mean in the context of sustainable business? Every company should keep its greenhouse gas emissions – which are unavoidable in the provision of business services – as low as possible. Sustainable business cannot be achieved at the push of a button, but a continuous optimization process based on ecological indicators is the crucial approach.

By recording the greenhouse gas emissions generated by your company, product, or service, you can identify potential for emission reduction. This enables you to optimize your processes and also save costs. You communicate to your customers and suppliers that you take responsibility for the emissions for which you are responsible. This allows you to build trust and adapt to the requirements of your business partners.

Acting now is worthwhile

Knowing your emissions will prepare you for predictable, more stringent regulatory requirements, such as increasing greenhouse gas emissions taxes or the mandatory implementation of investment-intensive measures. Incorporating this component into your corporate risk management is essential in the long term.

Due to the ongoing social demand for Climate protection, even the European Central Bank under Christine Lagarde has now taken the inevitable course of giving capital preferential treatment to companies that can demonstrably Climate protection The same trend is evident in the capital flow of large asset managers, such as BlackRock. Their chairman, Larry Fink, wrote in a letter to his CEOs that companies that do not address environmental issues seriously and transparently are no longer viable and will therefore no longer be invested in.

Climate protection Therefore, operating your company professionally and verifiably is inevitable in the near future. If your company is among the first to address this situation, you will establish a pioneering effect that prepares you for the foreseeable legal requirements, results in lower capital costs in the long term, and guarantees market advantages!

ACTING NOW IS WORTH IT

When it comes to sustainability or ecological viability, climate change and human influence on it are central, as in hardly any other area can environmental impacts be measured and documented so well with figures. The indicator here is anthropogenic emissions, i.e., greenhouse gas emissions caused by humans that contribute to global warming.

What does this mean in the context of sustainable business? Every company should keep its greenhouse gas emissions – which are unavoidable in the provision of business services – as low as possible. Sustainable business cannot be achieved at the push of a button, but a continuous optimization process based on ecological indicators is the crucial approach.

By recording the greenhouse gas emissions generated by your company, product, or service, you can identify potential for emission reduction. This enables you to optimize your processes and also save costs. You communicate to your customers and suppliers that you take responsibility for the emissions for which you are responsible. This allows you to build trust and adapt to the requirements of your business partners.

Acting now is worthwhile

Knowing your emissions will prepare you for predictable, more stringent regulatory requirements, such as increasing greenhouse gas emissions taxes or the mandatory implementation of investment-intensive measures. Incorporating this component into your corporate risk management is essential in the long term.

Due to the ongoing social demand for Climate protection, even the European Central Bank under Christine Lagarde has now taken the inevitable course of giving capital preferential treatment to companies that can demonstrably Climate protection The same trend is evident in the capital flow of large asset managers, such as BlackRock. Their chairman, Larry Fink, wrote in a letter to his CEOs that companies that do not address environmental issues seriously and transparently are no longer viable and will therefore no longer be invested in.

Climate protection Therefore, operating your company professionally and verifiably is inevitable in the near future. If your company is among the first to address this situation, you will establish a pioneering effect that prepares you for the foreseeable legal requirements, results in lower capital costs in the long term, and guarantees market advantages!

ACTING NOW IS WORTH IT

When it comes to sustainability or ecological viability, climate change and human influence on it are central, as in hardly any other area can environmental impacts be measured and documented so well with figures. The indicator here is anthropogenic emissions, i.e., greenhouse gas emissions caused by humans that contribute to global warming.

What does this mean in the context of sustainable business? Every company should keep its greenhouse gas emissions – which are unavoidable in the provision of business services – as low as possible. Sustainable business cannot be achieved at the push of a button, but a continuous optimization process based on ecological indicators is the crucial approach.

By recording the greenhouse gas emissions generated by your company, product, or service, you can identify potential for emission reduction. This enables you to optimize your processes and also save costs. You communicate to your customers and suppliers that you take responsibility for the emissions for which you are responsible. This allows you to build trust and adapt to the requirements of your business partners.

Acting now is worthwhile

Knowing your emissions will prepare you for predictable, more stringent regulatory requirements, such as increasing greenhouse gas emissions taxes or the mandatory implementation of investment-intensive measures. Incorporating this component into your corporate risk management is essential in the long term.

Due to the ongoing social demand for Climate protection, even the European Central Bank under Christine Lagarde has now taken the inevitable course of giving capital preferential treatment to companies that can demonstrably Climate protection The same trend is evident in the capital flow of large asset managers, such as BlackRock. Their chairman, Larry Fink, wrote in a letter to his CEOs that companies that do not address environmental issues seriously and transparently are no longer viable and will therefore no longer be invested in.

Climate protection Therefore, operating your company professionally and verifiably is inevitable in the near future. If your company is among the first to address this situation, you will establish a pioneering effect that prepares you for the foreseeable legal requirements, results in lower capital costs in the long term, and guarantees market advantages!

ACTING NOW IS WORTH IT

When it comes to sustainability or ecological viability, climate change and human influence on it are central, as in hardly any other area can environmental impacts be measured and documented so well with figures. The indicator here is anthropogenic emissions, i.e., greenhouse gas emissions caused by humans that contribute to global warming.

What does this mean in the context of sustainable business? Every company should keep its greenhouse gas emissions – which are unavoidable in the provision of business services – as low as possible. Sustainable business cannot be achieved at the push of a button, but a continuous optimization process based on ecological indicators is the crucial approach.

By recording the greenhouse gas emissions generated by your company, product, or service, you can identify potential for emission reduction. This enables you to optimize your processes and also save costs. You communicate to your customers and suppliers that you take responsibility for the emissions for which you are responsible. This allows you to build trust and adapt to the requirements of your business partners.

Acting now is worthwhile

Knowing your emissions will prepare you for predictable, more stringent regulatory requirements, such as increasing greenhouse gas emissions taxes or the mandatory implementation of investment-intensive measures. Incorporating this component into your corporate risk management is essential in the long term.

Due to the ongoing social demand for Climate protection, even the European Central Bank under Christine Lagarde has now taken the inevitable course of giving capital preferential treatment to companies that can demonstrably Climate protection The same trend is evident in the capital flow of large asset managers, such as BlackRock. Their chairman, Larry Fink, wrote in a letter to his CEOs that companies that do not address environmental issues seriously and transparently are no longer viable and will therefore no longer be invested in.

Climate protection Therefore, operating your company professionally and verifiably is inevitable in the near future. If your company is among the first to address this situation, you will establish a pioneering effect that prepares you for the foreseeable legal requirements, results in lower capital costs in the long term, and guarantees market advantages!

ACTING NOW IS WORTH IT

When it comes to sustainability or ecological viability, climate change and human influence on it are central, as in hardly any other area can environmental impacts be measured and documented so well with figures. The indicator here is anthropogenic emissions, i.e., greenhouse gas emissions caused by humans that contribute to global warming.

What does this mean in the context of sustainable business? Every company should keep its greenhouse gas emissions – which are unavoidable in the provision of business services – as low as possible. Sustainable business cannot be achieved at the push of a button, but a continuous optimization process based on ecological indicators is the crucial approach.

By recording the greenhouse gas emissions generated by your company, product, or service, you can identify potential for emission reduction. This enables you to optimize your processes and also save costs. You communicate to your customers and suppliers that you take responsibility for the emissions for which you are responsible. This allows you to build trust and adapt to the requirements of your business partners.

Acting now is worthwhile

Knowing your emissions will prepare you for predictable, more stringent regulatory requirements, such as increasing greenhouse gas emissions taxes or the mandatory implementation of investment-intensive measures. Incorporating this component into your corporate risk management is essential in the long term.

Due to the ongoing social demand for Climate protection, even the European Central Bank under Christine Lagarde has now taken the inevitable course of giving capital preferential treatment to companies that can demonstrably Climate protection The same trend is evident in the capital flow of large asset managers, such as BlackRock. Their chairman, Larry Fink, wrote in a letter to his CEOs that companies that do not address environmental issues seriously and transparently are no longer viable and will therefore no longer be invested in.

Climate protection Therefore, operating your company professionally and verifiably is inevitable in the near future. If your company is among the first to address this situation, you will establish a pioneering effect that prepares you for the foreseeable legal requirements, results in lower capital costs in the long term, and guarantees market advantages!

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