Demystifying Sustainability: A New Focus on Financial ESG Risk

Lazard Asset Management indicates that new sustainability regulations have effectively doubled the size of the market for sustainable funds in Europe to €2.50tn up from €1.10tn at the end of 2020. The impending Sustainable Finance Disclosure Regulation (‘SFDR’) will require asset managers, financial advisors and other market participants to self-certify their investment in categories spanning:

• Article 6: applies to all funds regardless of whether they have an ESG focus or not. All funds and strategies must disclose how sustainability risks are integrated into investment decisions and how sustainability risks may effect the product’s financial return.
• Article 8: ‘Light Green’: applies to investment strategies that promote environmental or social characteristics.
• Article 9: ‘Dark Green’: applies to investment strategies that have sustainable investment as an explicit objective.

 The SFDR will also require financial firms that produce or sell sustainable investment products in Europe to report quantitative data on 14 different mandatory ESG metrics and have the option to disclose information on a broader list of voluntary measures, starting in 2020.