As the European Union pushes forward in its commitment to transparent and trustworthy sustainable finance practices, a new wave of regulatory refinement is seemingly on the horizon. With Maria Luís Albuquerque nominated as the next EU Commissioner for Financial Services, her focus on strengthening the Sustainable Finance Disclosure Regulation (SFDR) reflects a clear agenda: improve the comparability of ESG disclosures, protect investors, and crack down on greenwashing.
This moment of regulatory recalibration presents an opportunity to spotlight the role of third-party verification—specifically, sustainability assurance—as a solution to ensure SFDR reports are both reliable and meaningful. In this article, we explore how Albuquerque’s proposed SFDR enhancements and the likelihood that mandatory sustainability assurance will be required could provide the transparency needed to strengthen investor confidence in sustainable financial products and combat misleading ESG claims across the market.
Sustainability assurance: a primer
As sustainability matters now occupy a preponderant role in boardroom agendas and policymaker considerations, expectations that sustainability-related information disclosed by companies and financial institutions to be accurate and verifiable are at an all-time high. Inadvertently misleading claims about a firm’s green credentials could easily spiral out of control, causing a severe loss of trust that can be difficult to regain.
This is where sustainability assurance comes into play. In a nutshell, it entails “the independent validation of sustainability data and disclosures, to enhance the credibility and trustworthiness of this information.”
Mandatory sustainability assurance is gaining traction in the European sustainable finance regulatory framework. One of the most distinguishing features of the recently-passed Corporate Sustainability Reporting Directive (CSRD) is the requirement for in-scope firms to undergo third-party assurance on sustainability data. This is designed to verify the reliability and accuracy of reported information, as under this mandate, in-scope companies must engage an EU-approved auditor to assess their data, providing assurance similar to financial audits.
SFDR revisions: the case for third-party assurance
The SFDR currently lacks a uniform categorisation system and a mandatory assurance requirement. This can raise the incidence of inconsistent ESG claims and can contribute to investor confusion and scepticism. In fact, it is not uncommon for retail and institutional investors alike to wonder whether the ESG funds they are investing in are actually contributing to sustainability-related objectives.
Albuquerque’s potential SFDR revisions align closely with the CSRD’s objectives, aiming to improve the clarity and comparability of ESG disclosures across financial products and creating a streamlined classification system based on robust criteria. The introduction of such clear categories with defined criteria aligns with the principles of assurance – in other words, they would help ensure that applicable standards and rules are respected.
To strengthen the SFDR’s impact, Albuquerque proposes integrating it more closely with the broader sustainable finance framework, particularly by standardising disclosures and avoiding redundant processes. She also stresses the need for disclosures that are meaningful and accessible to investors, eliminating opportunities for greenwashing that arise from vague or misleading ESG claims.
This more focused approach to the SFDR can significantly reinforce transparency across the EU’s sustainable finance ecosystem and help mobilise private capital towards the ambitious sustainability goals set in the European Green Deal. As a matter of fact, these goals cannot be achieved with public resources alone, further emphasising the importance of an efficient and effective sustainable finance framework that gives sustainability-minded investors the trust and confidence needed to allocate capital in an ESG-conscious manner.
Similar to traditional financial audits, third-party sustainability assurance is far from being a simple compliance checkbox. It is a foundational tool for creating reliability and trust in ESG reporting. Independent verification supports SFDR objectives by validating the claims asset managers make, which is especially vital as greenwashing can significantly erode societal trust at a time where making appropriate investment decisions is critical for the future of the planet.
As the SFDR will likely be revised to include mandatory sustainability assurance to reassure investors, asset managers should see the implementation of stringent third-party assurance as an opportunity to differentiate their genuine ESG performance from mere marketing and reassure investors that their sustainability metrics reflect reality.
Third-party sustainability assurance embedded within the SFDR would not only address greenwashing risks but also set a benchmark for ESG integrity. Asset managers who obtain third-party assurance gain a competitive edge, as they demonstrate a commitment to transparency that resonates with stakeholders and enhances market confidence. This assurance provides investors with clearer, more comparable data, reducing the risk of misinformation and helping sustainable finance grow on a foundation of trust.
Strategic steps to get ahead
Asset managers – particularly those with a strong ESG dimension in their investment philosophy – should adopt a proactive approach to sustainability assurance. Although SFDR does not mandate sustainability assurance (yet), they should assess the robustness of their processes around data collection and reporting, key performance indicators (KPIs) measurements, and the alignment of the KPIs with their sustainability strategy.
Engaging with assurance providers early in this process is an important factor, as it would allow asset managers to streamline their reporting structures and close any gaps before mandatory assurance deadlines. Moreover, considering “dry-run” audits would allow them to simulate sustainability assurance processes in advance. By adopting these strategies, asset managers can ensure that they meet upcoming regulatory expectations with accurate, reliable sustainability data.
In this rapidly evolving regulatory landscape, third-party assurance becomes more than a compliance tool; it is an essential driver of trust. For investors and asset managers alike, the upcoming SFDR revisions present a defining opportunity to embrace genuine ESG accountability and transparency, establishing a solid foundation for sustainable finance in the years to come.
