Sustainable Finance Disclosure

One of these initiatives is the Sustainable Finance Disclosure Regulation (SFDR), a regulation on sustainability reporting with significant implications for the real estate sector. The SFDR entered into force on 10 March 2021. It requires, among other things, financial market participants proposing sustainable financial products within the EU, and financial advisors, to be transparent about their approach on incorporating sustainability risks. It also requires these parties to evaluate adverse sustainability impacts of their investment decision or investment advice. These disclosures must be made on their website, in pre-contractual disclosures, and in annual reports.

The purpose of the SFDR is to (i) allow investors to make better informed decisions when determining which products fit their sustainability needs when selecting investment products, (ii) counteract ''greenwashing'' (making an investment product appear more sustainable than it actually is), and (iii) harmonise disclosure requirements within the EU. To reach these goals, the SFDR imposes disclosure obligations both at financial product level and entity level.

Product level disclosures - Classification of financial products

A distinctive part of the SFDR concerns the so-called classification requirement of financial products. A financial product should be classified as:

  • A financial product without a sustainability ambition (Article 6);
  • A financial product that promotes environmental or social characteristics, so-called light green products (Article 8); or
  • A financial product that has sustainability and/or social investment as its objective, so-called dark green products (Article 9).

The more ambitious the product, the stricter the disclosure requirements are under the SFDR. The manner and content of the disclosure requirements under the SFDR are further described in the regulatory technical standards, which are adopted by means of a delegated regulation and entered into force on 1 January 2023 (SFDR RTS). The information that needs to be disclosed with respect to Article 8 or Article 9 products must be provided through specific templates that are included as annexes to the SFDR RTS.

Entity level disclosure - PAI statement

Under Article 4 of the SFDR, financial market participants and financial advisors can also be obligated to issue a so-called Principle Adverse Impact statement (PAI statement). This is a sustainability statement. Article 4 of the SFDR is a “comply” or “explain” clause. This means that financial market participants and financial advisors can choose between the following:

  • the company takes PAIs into account and explains how it does so ("comply"); or
  • the company does not consider PAIs and explains why it does not ("explain").

However, companies with more than 500 employees do not have this option; they are required to consider PAIs. This PAI statement must be published on the financial company’s website by June 30 of each year.

With the SFDR RTS coming into effect, the format to be used for this PAI statement has also been determined. Companies can no longer decide how and to what extent they report on PAI – the template stipulates that information must be gathered and provided on at least 20 adverse sustainability indicators. Two of those adverse sustainability indicators specifically pertain to real estate: (i) exposure to fossil fuels through real estate assets and (ii) exposure to energy-inefficient real estate assets.

Impact on actors within real estate

The real estate sector is significantly impacted by the SFDR, since many actors, such as real estate investors and asset managers, qualify as financial market participant or financial advisor under the SFDR. Consequently:

  • The sustainable financial products offered by these real estate actors, such as real estate investment funds, are subject to the SFDR. This includes – but is not limited to – a classification system based on the sustainable ambition of the product.
  • Real estate funds that are marketed in the EU are subject to the SFDR's PAI reporting requirements.
  • Parties, such as developers, doing business with financial market participants, should take these obligations under the SFDR into account, even though these regulations do not apply to them.
  • Real estate advisors, such as real estate agents or brokers, may be subject to the SFDR's disclosure requirements if they provide financial advice or promote financial products that are subject to the SFDR.

National financial market authorities may take enforcement measures against financial market participants and financial advisors in the case of non-compliance with the SFDR who in turn, may have a corresponding claim against their contracting parties. In the Netherlands this is the Dutch Financial Market Authority, or AFM.

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In these blogs, ESG experts from the Loyens & Loeff Real Estate practice group regularly share insights and reflect on ESG topics from a real estate perspective. Together with the ESG focus group with specialists from across our different practice groups and home markets, we combine ESG expertise, project and transactional advice, transaction and litigation experience to enable your success. For more information, please contact one of the members of our Real Estate practice group below.
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