EU sustainable finance disclosures come into effect

offshore wind farm

New regulations aim to incentivise sustainable investment.

The Sustainable Finance Disclosure Regulation (SFDR), a cornerstone of the European Commission’s Action Plan on Sustainable Finance, has come into effect today. New regulations were deemed necessary to help investors avoid greenwashing while still incentivising responsible investment in sustainable projects and business.

With Europe committed to net zero by 2050, the financial sector will play a key role in allocating funds to the right assets, projects and businesses to achieve it. For example, a rush by investors to decarbonise funds by spending on offsetting measures has raised questions about how values are validated.

From planting trees to building solar power plants, there has been growing concern that investors and consumers simply don’t have the tools available to accurately assess and compare sustainability like-for-like. This may now change as the SFDR sets new rules to help standardise how the finance sector informs clients about sustainability risks in their investments and about the impact their choices are on the environment and society.

It is hoped that the new standardised model for information will help redirect investments towards greater sustainable impact, but the new rules are just part of a much larger package being pursued.

While these rules focus on governance, the Sustainable Europe Investment Plan aims to mobilise not just €1tn of EU finance for sustainable projects, but also generate an improved framework through which private investors can invest in these projects. So, in combination, this may prove to be a stimulus for more sustainable and renewable projects in the coming years.