Regulation | ~ 3 min read

Separating SDR from SFDR: how do they compare?

It’s been hard to miss the visibility and impact of the European Union’s Sustainable Finance Disclosure Regulation (SFDR) over the last few years. Now, the UK is adding its Sustainability Disclosure Requirements (SDR) to the regulatory mix. While the aim of SDR is intended to be different, it is evident that the approach has been influenced by the implementation of SFDR.

SFDR was intended as a reporting requirement, yet in practice it has been largely viewed by the investment community as a type of label for sustainable finance products. It was expected to increase transparency, but investors are still finding it challenging to compare funds under SFDR. Two issues in particular stand out. First is the lack of an agreed methodology for calculating the sustainable investment share (the percentage of a fund considered to be sustainable according to SFDR). Second, the necessary thresholds for sustainable investments in funds that fall within SFDR Article 8 and Article 9 categories are not defined. The diverging approaches applied by asset managers have resulted in less transparency for investors.

The UK’s proposed SDR differs from very clearly being a labelling regime. It includes detailed criteria for its three proposed labels – Sustainable Focus, Sustainable Improvers and Sustainable Impact. This clarity will aid the comparability of products for the benefit of clients and distributors.

Recognising the transition to green

Perhaps the highest profile element of the SDR proposal is the Sustainable Improver category. It is the first regulatory approach to provide guidance on “getting to green” rather than being green. At a time when measuring sustainability continues to evolve, this label is a potential game-changer for investors as transition can now be a strategy in itself.

It also aligns with recent enhancements to our investment tools at Allianz Global Investors, including:

  • Our key performance indicator-based (KPI) approach – a new sustainable product category for us – can help investors to embed a steady year-on-year improvement for a given sustainability KPI, for example, scope 1 and scope 2 greenhouse gas emissions, or emissions intensity.
  • We also offer a net-zero alignment toolkit, which aggregates corporates’ willingness and ability to meet net-zero targets as well as their implementation of those targets.

Over the course of next year, we expect rising investor demand for new KPIs across the themes of planetary boundaries, which focuses on life in a higher temperature world; and inclusive capitalism, which addresses the issues of living equitably with higher temperatures and an evolving global economy.

Positive development

Sustainability regulation is complex with diverging approaches from policymakers. We expect this to be the case through this year and into next year. While the industry is still some way from convergence on regulations, we appreciate the lessons learned from SFDR that have been applied to SDR, particularly the notions of transition and stewardship that are core to our own approach to active asset management.

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