Sustainability-related finance disclosures are a win for the economy (2024)

Blog | 23 Jan 2024

Sustainability-related finance disclosures are a win for the economy

Sustainability-related finance disclosures are a win for the economy (1)

Shilpita Mathews

Senior Economist

Sustainability-related finance disclosures are a win for the economy (2)

Outside the financial sector, people might be forgiven for dismissing the Sustainable Finance Disclosure Regulation’s (SFDR) latest public consultation as one more addition to the European Commission’s myriad of regulatory measures and reforms. That would be a mistake as the SFDR will have implications not only for firms operating in the financial sector but also for all the companies they facilitate investment in — and those companies’ broader stakeholders.

The European Commission introduced the SFDR in 2021 to require financial managers to disclose how they consider sustainability risks as part of their investment process. The main aim of the SFDR is to improve transparency, comparability, and the quality of sustainable investing.

The Sustainable Finance Disclosure Regulation and other sustainability disclosure initiatives are part of a broader movement to add transparency to the economic system in regard to sustainability performance. From a financial perspective, this is about mitigating risks posed by different elements broadly defined as “sustainability-related”. This includes greenhouse gas emissions, dependency on environmental assets, and human rights performance. Identifying these risks and either avoiding or mitigating them will improve risk-adjusted financial performance.

Alongside improving the performance of financial capital, this is also an opportunity to achieve the bigger societal goal of shifting capital allocation away from unsustainable economic activity towards economies that meet global climate and nature targets. Investors can have a first-mover advantage by investing early in sustainable activities. It is a worthy aim, but no one should expect an easy ride.

Sustainability-related finance disclosures are a win for the economy (3)
Making investing transparent

Currently, the transparency requirements under the Sustainable Finance Disclosure Regulation vary depending on the type of investment product. Investment products are classified under three categories (Article 6, 8, and 9) — products deemed to have more sustainability characteristics have more stringent requirements on disclosures. However, the system is not perfect, and there have been concerns that the regulation is being used as a labelling system, rather than achieving its aim of promoting greater transparency. In view of this, many asset managers are calling for a change in the regulation. For instance, a key suggestion is to include a “transition investments” category, which would encourage fund managers to bring measurable improvements to the sustainability profile of assets they invest in, so encouraging investment in activities that promote economic transformation.

Adopting a broader transition-oriented approach in disclosure requirements, as is being done in the UK’s equivalent Sustainable Disclosure Framework, can frame the conversation away from a box-ticking regulatory exercise to a unified sectoral effort to catalyse investment in sustainable activities. Investors can use information from the Sustainable Finance Disclosure Regulations to seize sustainable investment opportunities. Investors can also be rewarded with risk-adjusted returns, by accounting for all sustainability-related disruptions that their portfolio is exposed to.

Sustainability-related finance disclosures are a win for the economy (4)
Preventing the dominoes from falling

The increasing number of sustainability regulations across the world can be overwhelming to financial actors, adding complexity alongside promoting transparency in the financial system. Therefore, it is important to take a step back and consider the purpose of sustainability disclosures — identifying and reducing financial risks due to sustainability-related disruptions.

In the natural environment, these disruptions can have a domino effect across the economy, rippling up to the financial system via their counterparties. For example, disruption to agriculture in China impacts the production of fibres for textiles for upholstery, as well as derived products such as lubricants for machinery. This, in turn, affects the performance of EU-based automotive manufacturers that rely on these products, and subsequently their global investors. Neglecting the management of risks across the value chain can result in what economists call systemic risk, or the possibility that disruptions reverberate and trigger instability in an entire economy.

Forward-looking financial actors have started to join these dots and are calling for better alignment between the sustainability disclosure regulations they face and the reporting requirements for their counterparties.

The Corporate Sustainability Reporting Directive (CSRD) is the regulation that covers most companies in the EU, requiring them to report on their sustainability impact and risks. Given that the finance-sector focused Sustainable Finance Disclosure Regulation came into force before the company-focused CSRD, financial actors have concerns on alignment between the two disclosures.

Specifically, they have questions on how to tackle Sustainable Finance Disclosure Regulation requirements on topics that their investee companies deem “non-material” in their CSRD disclosures, asserting that there is a risk that companies will not disclose information financial actors themselves consider material.

Sustainability-related finance disclosures are a win for the economy (5)
Better evidence means better performance

While much of the discussion is rather technical, the implications of getting it right are real. If you are an individual or organisation with financial investments, surely you want potential losses from long-term climate and other sustainability-related impacts explicitly considered. Individual companies are best placed to disclose on what their business activities are exposed to. In fact, investors have a fiduciary duty to consider all risks, including sustainability-related risks, which may jeopardise your money. But getting meaningful evidence with which to act is challenging.

For business leaders and investment managers, having access to better information can help with decision-making. Of course, what those specific decisions are is still largely up to their expertise and discretion, but greater transparency means the market can better judge their performance, rewarding sustainability-inclusive financial performance, and building resilience into the economy.


Sustainability-related finance disclosures are a win for the economy (6)
Shilpita Mathews

Senior Economist


Sustainability-related finance disclosures are a win for the economy (7)

Shilpita Mathews

Senior Economist

London, United Kingdom

Shilpita joined Oxford Economics’ Economics & Sustainability team, bringing valuable experience from roles at Deloitte, Vivid Economics and McKinsey & Company, with a focus on sustainable finance and climate and nature risk assessment. Her work has spanned public and private sector clients, with a focus on financial institutions.

Shilpita holds a First-Class BA (Hons) in Land Economy from the University of Cambridge and a MSc in Environmental Economics & Climate Change (Hons) from the London School of Economics and Political Science.


Climate ChangeCSRDEconomyEuropean CommissionFinancial disclosuresGreenhouse gas emissionsInvestmentRisksSFDRSustainabilitySustainability disclosuresSustainability RiskUK

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The blog article by Shilpita Mathews explores the significance of the Sustainable Finance Disclosure Regulation (SFDR) introduced by the European Commission in 2021. This regulation mandates financial managers to disclose how they consider sustainability risks in their investment processes. As a seasoned expert in sustainable finance, let's dissect the key concepts covered in the article:

  1. Sustainable Finance Disclosure Regulation (SFDR):

    • SFDR is a regulatory framework introduced by the European Commission to enhance transparency, comparability, and the quality of sustainable investing.
    • It requires financial managers to disclose how they integrate sustainability risks into their investment decisions.
  2. Transparency and Sustainability Performance:

    • The article emphasizes the broader movement towards transparency in the economic system regarding sustainability performance.
    • The aim is to identify and address risks related to elements broadly defined as "sustainability-related," including greenhouse gas emissions, environmental asset dependency, and human rights performance.
  3. Financial Performance and Risk Mitigation:

    • Mitigating sustainability-related risks, such as those associated with climate change and human rights, is seen as a way to improve risk-adjusted financial performance.
    • Investors are encouraged to identify and either avoid or mitigate these risks, contributing to better financial outcomes.
  4. Categories of Investment Products:

    • Investment products are classified under three categories: Article 6, 8, and 9.
    • Products with more sustainability characteristics face more stringent disclosure requirements.
  5. Challenges and Suggestions for Improvement:

    • Concerns are raised about the SFDR being used more as a labeling system than achieving its transparency goals.
    • Calls for changes in the regulation, such as introducing a "transition investments" category, are discussed to encourage measurable improvements in sustainability profiles.
  6. Aligning with Societal Goals:

    • The article highlights that, besides improving financial capital performance, embracing sustainable finance is an opportunity to contribute to broader societal goals.
    • Shifting capital towards economies meeting global climate and nature targets is emphasized.
  7. Complexity of Sustainability Regulations:

    • The article acknowledges that the increasing number of sustainability regulations worldwide can be overwhelming for financial actors.
    • It emphasizes the importance of aligning sustainability disclosure regulations with reporting requirements for counterparties.
  8. Corporate Sustainability Reporting Directive (CSRD):

    • The CSRD is mentioned as a regulation covering most companies in the EU, requiring them to report on their sustainability impact and risks.
    • Concerns are raised about the alignment between SFDR and CSRD disclosures.
  9. Importance of Better Evidence:

    • The article underscores the significance of having meaningful evidence to consider all risks, including sustainability-related risks, in decision-making.
    • Better information can aid business leaders and investment managers in making informed decisions and can contribute to market judgment.
  10. Author Information:

    • Shilpita Mathews is identified as a Senior Economist with valuable experience in sustainable finance and climate and nature risk assessment.

In conclusion, this article provides a comprehensive overview of the challenges and opportunities in sustainable finance, offering insights into the evolving regulatory landscape and the importance of transparency in achieving both financial and societal goals.

Sustainability-related finance disclosures are a win for the economy (2024)


Why is sustainability disclosure important? ›

Sustainability reporting helps make organizations' decision-making processes more efficient and, in turn, enables them to reduce risk across their supply chain. This process reduces waste, yielding significant cost savings.

What is sustainable finance disclosure? ›

The EU Sustainable Finance Disclosure Regulation (SFDR) is a set of EU rules which aim to make the sustainability profile of funds more comparable and better understood by end-investors.

Why the disclosure of sustainable information has become an important and influential consideration for investors? ›

Sustainability reporting creates numerous advantages, including the enhancement of risk management strategies, the optimization of costs and savings, the streamlining of decision-making processes, and the bolstering of corporate trustworthiness and reputation.

What is sustainability disclosure requirements? ›

The SDR Regime introduces an anti-greenwashing rule which imposes a requirement for all regulated firms to ensure that sustainability-related claims in all marketing materials and communications are clear, fair and not misleading.

Why is sustainability reporting important in financial reporting? ›

Sustainability reporting helps companies communicate both positive and negative impacts of their actions on the environment, society as well as economy, and accordingly set priorities.

What is sustainability and why is it important? ›

Sustainability is our society's ability to exist and develop without depleting all of the natural resources needed to live in the future. Sustainable development supports this long-term goal with the implementation of systems, frameworks, and support from global, national, and local entities.

What is the purpose of sustainable finance? ›

Sustainable finance is about financing both what is already environment-friendly today (green finance) and what is transitioning to environment-friendly performance levels over time (transition finance).

What does sustainable finance do? ›

Sustainable finance is about including environmental, social and governance considerations in investment decisions. It leads, in the long-term, to more investment in sustainable projects and activities.

Who does the sustainable finance disclosure regulation apply to? ›

The SFDR primarily applies to financial institutions operating in the EU (banks, insurers, asset managers, and investment businesses). Non-EU firms will be impacted indirectly due to EU subsidiaries, services offered in the EU, and market pressure.

Why is sustainability reporting important to society? ›

Sustainability reporting serves as a bridge between your organization and its stakeholders, both internal and external. It offers a platform to share vital information about your environmental, social, and governance (ESG) impacts, efforts, and initiatives.

How does sustainability disclosures affect investor decisions? ›

Ultimately, better disclosure of ESG data facilitates improved decision-making for investors, enabling them to make informed and sustainable choices based on clear and accurate information provided by companies about their environmental impact, social policies, and governance practices [Raimo, et al., 2021].

What are the benefits of effective sustainability reporting to investors? ›

Sustainability reporting benefits investors by providing transparency into a company's ESG risks and opportunities. This insight allows investors to assess long-term value creation potential, strategic preparedness, stakeholder engagement, regulatory compliance, and alignment with values.

Are sustainability disclosures mandatory? ›

There is currently no federal mandate for ESG (Environmental, Social, and Governance) reporting in the United States. However, there are various initiatives and regulations that require companies to disclose certain ESG information.

Why sustainability reporting should be mandatory? ›

Compliance mentality. 6.19 Submitters that supported the introduction of mandatory sustainability reporting did so for three main reasons: improved management of non-financial risks, investor's ability to value non-financial risks properly, and greater accountability and transparency.

How do you prove financial sustainability? ›

To measure financial sustainability, several risk measures are required as indicators of financial sustainability. In addition to profitability, liquidity and risk, sustainable investments also consider the criteria of environment, social affairs and good corporate governance (ESG).

Why is disclosure important in ESG? ›

ESG disclosures are beneficial for developing better sustainability and governance practices, as well as stronger financial performance. The data revealed in such reports can help businesses align their purpose, strategy, and operations to ESG.

Is sustainability disclosure mandatory? ›

SINGAPORE: All listed companies in Singapore will be required to make climate-related disclosures starting from the financial year (FY) of 2025, said Minister for Transport and Second Minister for Finance Chee Hong Tat on Wednesday (Feb 28).

Why are disclosure requirements important? ›

Disclosure requirements are crucial as they help investors and other stakeholders to make informed decisions about a company's financial performance and position. Failure to disclose the required information can lead to legal and financial consequences for the company.


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