Discover the implications of the European Union’s Sustainable Finance Disclosure Regulation for fund managers, and what it entails for private equity and venture capital industries, including fund maangers in emerging markets.
The SFDR is part of the broader European Green Deal, the EU’s plan to transform its economic model to address climate change. The plan includes achieving the EU’s commitments under the Paris Agreement. To enable delivery of the European Green Deal, the European Commission introduced an Action Plan on Financing Sustainable Growth in 2018. The SFDR is one of the pillars of the Action Plan.
The EU has various sustainability measures that are interrelated and at different stages of development, which creates complexity. Among others, these measures include environmental taxonamy reuglation, social taxonomy, EU Comission review of the SDFR, and the Corporate Sustainability Reporting Directive.
These regulations apply to any fund manager marketing funds in the EU. For example, the SFDR would apply to an Africa-focused fund in Lagos that is marketing to LPs, including DFIs, in the EU under national private placement rules (NPPR). Given the wide-ranging and extraterritorial application of the SFDR, it is likely to drive long-term ESG standards in the global PE and VC industries.
The SFDR is designed to give investors transparency about the ESG characteristics of funds, or the manager’s investment process, and prevent so-called green or impact ‘washing’, where managers of funds claim ESG processes, characteristics or impacts that are not implemented, monitored or cannot be substantiated with data.
Fund managers are expected to deliver objective, transparent and quantifiable ESG performance information. They're required to clearly disclose to their clients whether and how they approach, measure and track progress on sustainability and ESG, both at the firm and with respect to each fund. Fund managers whose investment processes integrate ESG in credible and thoughtful ways may benefit commercially from potentially greater fundraising traction and enhanced brand recognition, alongside the other advantages of effective ESG integration.
To help support our portfolio in understanding how global regulations apply to them in an emerging economies context, we've partnered with Akin Gump Strauss Hauer & Feld LLP, British International Investment, and the Joint Impact Model Foundation, to create this guidance to help fund managers better understand what the SDFR means for them. Access the guidance here.
