What is SFDR and EU Taxonomy?

What is SFDR and EU Taxonomy?

 What is SFDR?

The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation introduced to improve the transparency of sustainable investment products and to prevent greenwashing. It imposes comprehensive sustainability disclosure requirements covering a broad range of Environmental, Social & Governance (ESG) metrics.

In force since the 10th March 2021, SFDR is a fundamental pillar of the EU Sustainable Finance agenda, having been introduced by the European Commission as a core part of its 2018 Sustainable Action Plan.
SFDR categorises investment funds into three separate fund types depending upon each fund’s sustainability characteristics. These categories are:

  • Article 6: a fund has is deemed to have no environmental and sustainability characteristics.
  • Article 8: a fund that promotes environmental and sustainable characteristics but doesn’t have a sustainable investment as one of its objectives and as a result its sustainability goals are less tangible.
  • Article 9: a fund that has sustainable investment as one of its objectives and as a result its investments must be aligned with EU Taxonomy.

What is EU Taxonomy?

EU Taxonomy was introduced in January 2023 to oblige fund managers to categorise their sustainable investments into one or more of 6 environmental objectives. It is also intended to better help investors and their advisors understand a fund’s performance in relation to the EU’s climate goals under the Paris Agreement.

The 6 Environmental Objectives listed in Article 9 of EU Taxonomy are:

  • Climate change mitigation
  • Climate change adaption
  • The sustainable use and protection of water & marine resources
  • The transition to a circular economy
  • Pollution prevention and control
  • The protection and restoration of biodiversity and ecosystems

To be deemed sustainable, an activity must:

  • Substantially contribute to at least one of the six environmental objectives mentioned above.
  • Do no significant harm to any of the other environmental objectives.
  • Comply with minimum safeguards created to avoid negatively impacting societal stakeholders.

Activities that are aligned to one or more of the six objectives may either substantially contribute to environmental performance of industry directly, or act as an enabling or transition activity. Direct activities are those performed in an environmentally sustainable manner and Taxonomy aligned in their own right—things like the production of solar energy.

Enabling activities are products or services that enable other activities to make a substantial contribution, like the manufacture of batteries for electric vehicles, for example.

Transition activities are those where there is no technological and economically feasible low carbon alternative, but the activity supports the transition to a climate-neutral economy—this could be cars that emit less than 50g C02/km or building renovation.

From Article 8 to Article 9

There is a considerable overlap between EU Taxonomy’s 6 objectives, the objectives listed in OPEN’s SFDR Annex (as at 30/09/2022) and actions taken by Greenman on behalf of OPEN. The alignment of OPEN’s regulatory obligations and its investment intentions lay the foundation for OPEN’s long term capital allocation programme.

OPEN was classified as an Article 8 fund under SFDR in 2021. Recently the CSSF has given its approval for OPEN to convert to an Article 9 fund. We believe that converting to Article 9 will not only help achieve climate change goals but will also help to maximise the value of OPEN’s real estate assets, support our tenants’ long term sustainability goals and through further investment in Greenman Energy and other similar initiatives, protect and increase fund income and returns.
In the future we believe that investors will place much more emphasis on a fund’s sustainability characteristics. By converting to the highest level of regulatory approval (from a sustainability perspective) we would ensure that OPEN remains a popular fund choice amongst Investors.

OPEN’s Net Zero Pathway

One hundred and ninety-six countries, and the EU itself, are now signatories to the 2016 Paris Agreement on climate change. The governments of many of those countries are increasingly turning to their financial services sectors to help fulfil their commitments and channel investment into sustainable alternatives. It is our intention to fully align OPEN’s portfolio with the EU’s climate goals under the European Green Deal.

OPEN’s portfolio of properties emits c. 116,400t of CO2 annually. Our ambition is to reduce this to zero on a net basis by 2050. However, we estimate that these emissions are only 2% of the total greenhouse gas (GHG) scope 1,2 & 3 emissions of our grocery tenants. While we can only directly address our tenant’s scope 2 emissions, our ambitious goal is to support our grocery tenants in reducing their scope 1 & 3 emissions.

We have identified a number of separate actions which should, by 2050, reduce OPEN’s portfolio emissions. These are:

  • Reduction in electricity consumption
  • Reduction in gas consumption
  • Building efficiency
  • Heat loss recovery
  • Renewable energy generation
  • EV charging infrastructure

We forecast that by 31st December 2050 the amount of renewable energy generated by the portfolio will exceed the amount of energy consumed and as a result the portfolio’s carbon footprint will be below zero on a net basis.

« »