EU - Sustainable Finance Disclosure Regulation
Sustainable Finance Disclosure Regulation is an EU framework to make the sustainability information of funds more comparable, better understood by the investor community, other financial entities and stakeholders.
It includes defined metrics to assess environmental, social, and governance (ESG) outcomes within investment process. Thus, the focus is on disclosure, including a framework designated to identify any misconduct and harmful impact.
Current Situation
Within the EU Sustainable Finance Action Plan, the market is preparing to comply with new European regulation, the Sustainable Finance Disclosure Regulation (SFDR).
The final published report on the regulatory technical standards (RTS) for this regulation by the European Supervisory Authorities helps to answer matters that stakeholders were confused about.
This new regulation will require further ESG disclosures.
"An ongoing and increasing numbers of cases relying on fundamental and human rights enshrined in international law and national constitutions to compel climate action; challenging domestic enforcement (and non-enforcement) of climate-related laws and policies; seeking to keep fossil fuels in the ground; claiming corporate liability and responsibility for climate harms; addressing failures to adapt and the impacts of adaptation; and advocating for greater climate disclosures and an end to corporate greenwashing on the subject of climate change and the energy transition".- United Nations Environment Programme (2020). Global Climate Litigation Report: 2020 Status Review
This regulation is for financial market participants, as stipulated on the regulation are: " insurance undertaking which makes available an insurance‐based investment product, an investment firm which provides portfolio management; an institution for occupational retirement provision (IORP);a manuf cturer of a pension product; an alternative investment fund manager (AIFM); a pan‐European personal pension product (PEPP) provider; a manager of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013, a manager of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013;a management company of an undertaking for collective investment in transferable securities ;a credit institution which provides portfolio management". - EU
Technical Standards
The Sustainable Finance Disclosure Regulation (SFDR) requires that the financial market participants within the European Union listed above will have to disclose ESG criteria. Especially for products that promote ESG's or that have sustainable investment objectives. These will require further disclosures and requirements.
It is quite an improvement as the regulation will help to reduce the amount of greenwashing, improve transparency, making it easier for end investors to understand ESG and sustainability data and to interpret the impact in their portfolios.
Principal Adverse Impact (PAI)
The number of mandatory PAI indicators are reduced significantly from 34 to 18, although the comprehensive list, including voluntary indicators, is largely the same as before. For the voluntary indicators, financial market participants should choose based on materiality considerations. -Sustainalytics
An important fact for Hospitality, Lodging investments is that PAI indicators for sovereigns and real estate assets are now included.
A key factor is that the SFDR concept of doing no harm with investment activities is linked to the concept of "Principle Adverse Impact and the EU Taxonomy Minimum Safeguards". *This concept os different on the EUTaxonomy’s. It will chhange the current approach from a “tickbox” to dealing with systemic issues.
This new regulation will help with the commitment to responsible investment. It also brings clarity and standardization. Another aspect is the transparency of sustainability risk policies, adverse sustainability impacts at the entity level, of the integration of sustainability risks, transparency of the promotion of environmental or social characteristics in pre‐contractual disclosures, in periodic reports, and periodic review of disclosures.
The regulatory technical standards will leave many companies with a need to collect data availability and they will have a reporting challenge.
The RTS details specify key actions in the investment process such as exercising voting rights, active engagement, and divestment. It will challenge Fund Managers to further obtain data and also to monitor it. This will allow stakeholders to ensure that environmental and social challenges are a priority when investing in hospitality companies whether is divesting, with active engagement, this must drive real change and improve materiality.
It is very early to estimate the impact of SFDR on real change, and meaningful advances, on how accountable are the business for the environmental and social challenges, externalities, and governance practices. Thus, as we blossom from the current pandemic, it is an opportunity to make sustainability and regenerative practices a fundamental part of the overall business strategy.
Monitoring investment in hospitality assets is crucial at this specific time as, due to covid, many operations are taking place in the market. The responsible investment needs to be a priority to ensure that businesses are sustainable, competitive, and now, legally compliant.
Undoubtedly, companies need to widen their focus on capturing information about the processes and systems governing outcomes and impacts. Focus on deeply understanding narrow hospitality industry issues related to the core activities. Investors and companies must have a broader perspective and a longer-term vision. It is key to have a multi-stakeholder approach looking for disclosures in potential investment opportunities that companies self-reported, third-party data, and stakeholders intelligence (customers, suppliers, employees, etc.) to understand systems.
Gradually investors are moving from negative screening (not investing in companies to avoid risk or for not being aligned with values), positive screening (targeting companies that have better ESG performance), to sustainability-themed investments (such as green building investments) to finally, embrace impact investment. Impact investing occurs when companies target social and environmental impacts proactively, benefit stakeholders, report and measure their impact. Investing in purpose-driven companies that proactively seek solutions for global environmental and social systemic issues will result in a lower cost of capital, improved operational performance, and a higher return of equity.
Impact investing is the way forward for investments in hospitality. Read more about The ESH Club Initiative Hospitality Impact Investment here.