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SFDR: The Anti-Greenwashing Acronym You Need to Know
by Josh Green and Kyle Flick from Novata
If you’re working on or investing in the energy transition, you’ve probably heard of ESG. While ESG has received criticism in recent months, it's not going away. In fact, a new ESG regulation is on the horizon that will meaningfully impact the way most investors do business. It’s called the Sustainable Financial Disclosure Regulation (SFDR). With the imminent implementation of SFDR, sustainability disclosure will now become mandatory for funds in the EU, as well as for funds — and this is crucial — that market to EU investors. Essentially, funds will need to clearly disclose what their sustainability goals are and will be classified in three categories depending on those objectives. This will create headaches for many. But for some — including investors and entrepreneurs operating in the climate space — SFDR will create meaningful opportunities.
What is SFDR?
The SFDR is “a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants.” Put simply, a fund will be classified as an Article 6, 8, or 9 fund depending on its sustainability objectives. Principle Adverse Impacts (PAIs) are the fancy name given to the KPIs that must be tracked at the fund level if you are seeking a sustainability designation (Article 8 or 9). The diagram below attempts to distill a 200 page regulatory document that outlines requirements for each of these labels, so of course we are now obligated to suggest that you do your own research, consult your attorney, etc.
Note: If Article 6 funds choose not to track PAIs, they must disclose why they choose not to consider sustainability in their investment process.
What does this mean for investors?
SFDR is designed to drive convergence in how funds describe themselves with respect to sustainability. This should reduce confusion in the market and make greenwashing much more difficult. For allocators (e.g., pension funds, university endowments, etc.), this will make it easier to steer capital towards fund managers that are truly aligned with the allocator’s investment objectives.
For managers of capital (e.g., venture capital, private equity, etc.), SFDR is yet another regulation and therefore yet another compliance challenge. But, for those funds that are already incorporating sustainability into their investment process, SFDR is also a great opportunity. By reducing greenwashing, SFDR will make it easier for funds that think and act sustainably to further stand out from the crowd.
If you manage a fund that markets to EU investors, you are probably already planning for SFDR. But if you haven’t started, now is the time. Though there is still some uncertainty in how these new regulations will be implemented, we know that funds identifying as Article 8 or Article 9 need to track PAIs from January 2023 onwards. A good first step is consulting knowledgeable counsel about SFDR. You’ll also want to make sure your team is aligned around your approach to sustainability and has a process in place for collecting the required data.
What does this mean for entrepreneurs?
Know your worth. As an impact or climate change entrepreneur, you have the opportunity to help investors and funds position themselves favorably to the market. Tides are shifting, and if your business has an underlying social or environmental thesis, you will be in high demand as SFDR regulations take effect.
Target like-minded funds. As you pitch to investors, be mindful of what their investment thesis is, and how aligned you are with that thesis — they are now subject to regulation and must disclose to the best of their knowledge their social and environmental impacts.
Arm yourself with data. If you’re intimidated by the prospect of putting in place a full-fledged ESG data collection program, you’re not alone. But collecting basic ESG data will help you demonstrate to prospective investors your commitment to sustainability. Start small, with data points that specifically tell the story of the impact you’re having.
Is another acronym really the answer?
SFDR is not the first EU regulation with global implications. If your business collects personal data of any kind, you’ve experienced the pain of complying with the General Data Protection Regulation (GDPR). While it is debatable whether GDPR has meaningfully advanced the cause of data privacy, it is clearly the case that GDPR has gone well beyond the EU borders and impacted nearly all businesses with an online presence.
So it will go with SFDR. Though nominally focused on European investors, it will undoubtedly have global reach given the amount of investment capital flowing across borders. It’s also inspiring similar regulations elsewhere. The U.S. Securities and Exchange Commission and the U.K. Financial Conduct Authority have their own proposals in the pipeline.
The interesting question is whether SFDR will accomplish its goal of reducing greenwashing. So far, nothing has done the trick. But there’s something compelling about the simplicity of the SFDR framework, as well as its specificity around data collection. The bottom line: SFDR is good news for those among us who are hoping for an end to greenwashing. But it’s going to take work.
✍️ The Draw-down
In her next Climate Art Workshop on 11/29, Artist-in-Residence, Nicole Kelner, is teaching participants how to recreate this holiday-themed piece showcasing low-waste gift ideas. Take a break and fill up on seasonal inspiration! RSVP here.
🎙My Climate Journey Podcast
👩⚖️ Jason talked to Jill Tauber, Vice President of Litigation for Climate and Energy at EarthJustice, about the non-profit’s criteria for projects they take on, the IRA’s permitting, barriers holding us back, changes that could unlock faster progress, and where EarthJustice fits into all of this now and in the future.
🌍 Cody caught up with Emily McAteer, co-founder and CEO of Odyssey Energy Solutions, about how her company is bringing financing, procurement, and operational solutions to market to solve the local problems inherent in emerging markets.
👩💻 Climate Jobs
Vice President, Business Development and Client Growth at WeaveGrid (Remote/San Francisco, CA)
🗓 November + December Events
Be sure to click the event title for details & RSVP info. For more climate events, check out the #c-events channel in MCJ Slack.
🙋 AMA with David Antonioli: Our next MCJ Ask-Me-Anything is with David Antonioli, Chief Executive Officer of Verra. Verra accelerates action on climate change and sustainable development through standards that drive investment to achieve measurable high-integrity outcomes for global stakeholders. Check out his podcast with Jason here. (11/30)
💁♀️ Women in Climate Meetup: This is a monthly meetup for women who work in, or want to work in, climate. (11/30)
🇩🇪 MCJ Collective x Terra.do - Berlin Social: Converse and connect with entrepreneurs, operators, investors, academics, explorers, students and more who are all passionate about climate solutions. (12/01)
👋 MCJ Community Welcome Call: Connect, share and learn with MCJ team and community members. (12/01)
🤝 MCJ Career Transitions Meetup: This session will be a networking mixer where attendees will have the opportunity to join different breakout rooms based on function or sector to connect with others looking for similar roles or employees working in that space. Details here. (12/07)
☀️ MCJ Los Angeles Meetup: Grab a coffee or cocktail. Take a seat. We'll make some new friends and nerd out on your favorite topics- renewables, regenerative ag, CCUS, IRA, heat pumps- the list goes on! (12/10)
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