CSRD vs. SFDR

Introduced in January 2023, the CSRD materially expands the scope of the existing Non-Financial Reporting Directive (NFRD) disclosure regime which had a very limited scope. Generally, NFRD was only applicable to listed companies in the EU while CSRD expands it to listed and non-listed companies and even its active subsidiaries in Europe. The CSRD will incorporate external audits in order to review expressed environmental aspects and create director liability for such data. This new reporting framework also aims to add more comparable data on environmental, social, and governance aspects. Over time this will lead to more quantitative data versus the current qualitative ESG data sets in this space.

Regarding the SFDR, it has two levels of regulatory reporting standards. The first level, introduced in March 2021, required asset managers to disclose ESG-related information on their websites and pre-contractual documents with a specific focus on their fund offering. The second level, introduced in January 2023, expands the scope of sustainability reporting for asset managers and financial advisors. Also, the EU has introduced obligations regarding the reporting of principal adverse indicators (PAIs), which include defined templates and standardized calculation methods to ensure consistency. These obligations also impose pre-contractual and periodic data collection.

We can say that the CSRD and the SFDR are interconnected since the CSRD expands reporting obligations of companies to asset managers, while the SFDR expands the reporting obligations of asset managers to the investors in their funds.

Reporting challenges

However, these two reporting frameworks have created a reporting gap that asset managers are attempting to address. Indeed, although the CSRD is introducing new disclosure requirements for companies to ensure comparability, trustworthiness, and quality in the coming years, asset managers are already required to provide a lot of new non-financial information. However, often, in order to provide this information, they miss the required data from the investee companies given the weak disclosures within the existing NFRD regime. This gap leads to confusion in the market regarding how, what, and when to report.

One of the biggest challenges currently faced by asset managers due to the data gap is the lack of consistency in ESG reporting, making it difficult to compare companies on ESG metrics. Ultimately, this creates confusion for investors wanting to make decisions based on ESG criteria – impacting also the so-called ESG data providers.

The time and resources required to collect and analyse ESG data are also significant for asset managers as they are required to collect and report on a large amount of ESG data.

Without standardized reporting templates and procedures, data collection and reporting can be exposed to errors and inconsistencies which are challenging to verify.

Finally, the lack of data makes it challenging for asset managers to register the sustainability of financial products and assign them to the appropriate sustainability category. Therefore, most asset managers tend to use ESG data providers and integrate them into their investment process to supplement the information provided by companies and to ensure that they have a comprehensive and accurate view of the sustainability of financial products

Where our expertise comes into play

Reply can play a vital role in helping asset managers navigate these ongoing challenges. By leveraging their expertise in ESG reporting frameworks, data analysis, data collection automation and reporting automation.

Our expertise and evaluation of current processes will uncover your areas for improvement, leading to standardized templates, data sources and procedures for maximum efficiency. We recently worked with a global investment firm to implement and optimize reporting processes as well as design and implement automation tools to decrease manual effort and benefit from improved data accuracy. We also developed real-time insights through reporting dashboards, which enable our clients to collect data from multiple sources, including internal reporting systems and external ESG data providers.

We are committed to continuously review and improve reporting processes to ensure they are efficient, effective and in line with industry best practices.

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