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Sustainable Finance Disclosure Regulation

Is the financial industry ready for the Big One?

Climate change is considered to be one of the most significant threats to financial stability. According to the World Economic Forum (WEF), the cost of natural disasters worldwide was USD165 billion in 2018, more than the gross domestic product (GDP) of Hungary in 2018 (EUR157 billion).

A National Climate Assessment study forecasted that climate-related natural disasters will reach 10 percent of the global GDP by the end of the century1. The debt market has kept up its sustainability efforts, even amid the COVID-19 crisis, and the latest outlook and direction reports from the Climate Bonds Initiative (CBI) for the past 12 months have reported that, overall, the performance of the combined sustainable debt market (green, social, sustainability, etc.) was very strong in H1 2020, with over USD250 billion issued compared to USD341 billion for 20192.

The financial sector must take swift action to preserve its stability and limit damages caused by climate change. A series of recent regulations indicate that European regulators will use the financial sector to build and finance a low carbon economy. These include the European Union (EU) Taxonomy to define a common sustainability narrative for investors; the integration of sustainability preferences into the Markets in Financial Instruments Directive (MiFID, Directive 2014/65/EU); and the revision of the EU Non-Financial Reporting Directive (NFRD, Directive 2014/95/EU)3.

The closest regulation to come into force is the Sustainable Finance Disclosure Regulation – in short SFDR. In order to take the temperature of financial market participants’ (FMPs) understanding and level of readiness for the major changes foreseen, we conducted a survey among FMPs between June and September 2020. What are the main concerns of financial market players regarding the implementation of the SFDR? Read the report to learn more.

 

1. (https://nca2018.globalchange.gov/)
2. Climate Bonds Initiative (CBI) Global Sustainable Debt report: H1 2020 review of green, social, sustainability & pandemic markets
3. Articles 8 and 9 of the Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability related disclosures in the financial services sector
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