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August 3, 2021

Dylan Perales, Sustainability Lead at StartGreen, describes in this blog what the regulation of sustainability information means for StartGreen and its investors.

What is the purpose of the SDFR?
Since March 10, 2021, the Regulation on providing information on sustainability applicable. The Regulation is better known by its international name: the Sustainable Finance Disclosure Regulation, in short the SFDR. This regulation prescribes what financial market participants must communicate about certain sustainability matters. In this way, the EU wants to harmonize the provision of information and make it more transparent. The ultimate goal: to make it easier for end investors to compare financial products on ecological, social and governance risks (ESG) and on sustainable objectives.

European Action Plan
The SFDR is part of the Action Plan for Financing Sustainable Growth from the European Commission. The EU Taxonomy is also part of this: a new classification system that should provide clarity about what is sustainable. With this action plan, the EU wants to give the sustainable transition a push in the right direction and greenwashing appearance. My first reaction was: 'How cool, it's going to get really serious now!' Because parties that consider sustainability an afterthought or a hygiene factor are now obliged to pay serious attention to this.

My first reaction was: 'How cool, it's going to get really serious now!'

Challenging implementation
It soon became clear to us that implementing the regulation presented StartGreen and other asset managers with quite a challenge. The SFDR influences all kinds of processes: due diligence, drafting contracts and reporting. The implementation and execution therefore requires collaboration between different disciplines, such as Legal, Control, Risk & Compliance and the investment team. Moreover, the guidelines in the SFDR are not equally clear everywhere. Because what is, for example, 'sufficient communication'? That is why we started looking: what have we already included in our sustainability policy and what still needs to be done? Then we started closing that gap.

Benefits SFDR
The biggest advantage is that investors can more easily determine whether an investment is really green. Both the SFDR and the EU Taxonomy make this easier, with greater transparency and harmonisation. While this framework is not complete yet, it is certainly a step in the right direction. And because this regulation comes from the government, it carries more weight than the many existing frameworks on sustainable reporting. For organizations that do not yet have a policy in this area, the SFDR provides a useful framework. It also enables us to see whether we are on the same page in terms of policy and where we can add things.

Need to have
The StartGreen team has taken the SFDR implementation very seriously. We have already recorded quite a lot on the basis of intrinsic motivation, now that is an obligation. Our shareholders are also demanding more and more information. By nice to have is it now need to have become. The disadvantage is that the SFDR pushes lots through a certain sieve; that is not always optimal. To give an example: StartGreen is not currently active internationally, but the SFDR obliges us to report whether we comply with certain guidelines that are clearly less relevant for companies in the Netherlands, such as human rights in developing countries.

In addition, the reporting obligations are a challenge. Where we previously focused on about three positive impact KPIs per company, the SDFR now requires reporting at fund level on more than ten negative impact indicators (better known as the principle adverse sustainability impact).

What have we done specifically?
we have us sustainability policy made clearer on the website. There we describe very clearly how we deal with impact and how we measure it. We are now also sharing ESG Policy externally and we describe the sustainability risks that our portfolios run themselves. In addition to the effect of the company on the environment, we describe the effect of the environment (such as climate change) on the company.

We also now report more according to the SFDR guidelines. We already had some indicators in our reporting package, but we started measuring more and more specifically on the basis of the guidelines in the SFDR. For example, when it comes to diversity, we have already reported the male-female ratio in a company. Now we are also looking specifically at this relationship in the board of the company – partly through the SFDR.

Mapping sustainability risks
Thanks to the SFDR, we have now also started to map out the effects of climate change on our portfolio. We already did that before Energiefonds Overijssel, but now we're looking ahead all our funds what effect the transition may have on the portfolios. For example, what happens if the groundwater level in the Netherlands falls? This can be a direct financial risk for real estate, because a low water level can cause wood rot in piles. This in turn can have an indirect effect on the funds that have invested in making real estate more sustainable, for example with solar panels on the roof.

social annual accounts
The SFDR obliges all asset managers to share their sustainability policy. It would be nice if in the future every financial service provider would be obliged to prepare a social annual report on (positive and negative) impact. Because I believe that if you start measuring things, you make them more aware and you start acting on them. For example, I notice a positive effect in the field of diversity. Over the past year, a lot of attention has been paid to this within the venture capital-sector. By including this in the reports, it remains top-of-mind with the investment team and with entrepreneurs, so that in my opinion the importance of diversity is taken into account more often in new application rounds.

Gear transition
What I like best is that the SFDR can help convince investors to invest more in sustainable financing products due to the increased harmonization and transparency. This will free up more (private) capital to realize the transition to a sustainable economy. The latter fits in seamlessly with the goal of StartGreen and my own. That is why I wholeheartedly welcome this regulation.

This spring, Dylan shared his experience about the implementation of the SFDR in a webinar of the NVP (Dutch Association of Private Equity Companies). You can de video watch back on YouTube.

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