News: SFDR and real estate: Improving transparency of ESG measures - EverEstate

What does SFDR stand for?

The SFDR (Sustainable Finance Disclosure Regulation), which went into effect across the EU on March 10, 2021, aims to make the sustainability criteria of investment strategies more transparent. The requirements affect all organizations and providers active in the financial market in the EU. The SFDR classification and the associated disclosure obligation also require a new approach in the real estate industry and more transparency. This is regarding the precise designation of environmental and sustainability goals. Above all, the traceability of ESG factors is of great importance. We highlight what you should know when it comes to classifying investments and designating sustainability features for investment properties in the real estate industry. 

Significance, background and goals of SFDR

The SFDR is part of a package of legislative measures developed by the EU to make capital transactions more sustainable. With the help of the criteria, it will be easier for participants in the financial market to finance growth with a long-term focus on sustainability. At the same time, this is intended to prevent so-called "greenwashing", in which companies often over-emphasize environmentally friendly aspects of their activities that do not correspond to the facts at all. The fulfillment of these sustainability criteria is regulated by the Disclosure Ordinance as of 2021.

Product categories for transparency and comparability

Any financial market participant offering financial products in the EU must classify their products into one of several sustainability categories. Here, a distinction is made between three categories: Article 6, Article 8 and Article 9. According to Article 6, all traditional financial products must be listed in this category. Accordingly, all funds must disclose information about their sustainability aspects here, regardless of whether they are sustainable or non-sustainable funds. If a fund is assigned to Article 6, it does not consider any sustainability criteria or only to a minor extent, so it is not assigned to one of the other two Articles. Article 8 funds are financial products that have sustainability features and are advertised as such. If a fund is classified in accordance with Article 9, this indicates a sustainability objective is being pursued by the fund.

Effects of the new disclosure obligation

Financial market participants from the real estate sector are faced with more stringent requirements with regard to the transparent presentation of information on the sustainability features of their products as a result of the disclosure obligation. This means that environmental goals mentioned in connection with one's own offer must be described in more detail. However, sustainability criteria in the real estate sector are currently still somewhat incomplete. For example, there are currently no qualified ecological audits for real estate in Germany. For this reason, it has been agreed to work transitionally with the prevailing national standards and sets of rules. For this reason, it is possible to classify a real estate fund as sustainable if it ranks among the top 15% of properties on the market in terms of energy efficiency. The so-called Energy Performance Certificate Ratings are used for this determination in Germany.

Source: Media Article