Unravelling SFDR 2.0

The EU Sustainable Finance Disclosure Regulation (SFDR) has had a significant impact on the real estate investment market by prioritizing sustainability and pushing investment managers to clarify their ESG position. However, there are some shortcomings in the framework design specifically for the real estate sector. The SFDR has been used as a labelling regime, leading to ESG strategy being driven by desired classification. Some challenges arise from the choice of metrics for investments, the lack of reliable data, and sometimes the inaccurate perception of transition-focused strategies as “less sustainable” than greenfield development or acquiring best-in-class assets. Recognising these limitations, the European Commission has released a Targeted Consultation to address these issues. Additionally, UK-based investors have been consulted on the development of the UK Sustainability Disclosure Requirements (SDR), effective from Summer 2024. The SDR includes a voluntary product labelling scheme and mandatory disclosure for funds using sustainability-related terms, while non-ESG-focused products do not have the initial proposed mandatory requirements.

The focus should shift towards using standardized performance metrics that consider whole-life carbon, nature, and social impacts to incentivize investment in transitioning real estate. Asset owners and managers should benefit from developing strategies that yield measurable sustainable outcomes and engaging with industry organisations and the government to advocate for supportive regulations.

In this context, we have taken the opportunity to step back and take stock of the trends and challenges in sustainable real estate investment under the SFDR all backed by a comprehensive study of 38 direct investment funds. By immersing yourself in this article, you will gain valuable insights on what Sustainable Finance Disclosure Regulation (SFDR) 2.0 might look like and its potential impact on the real estate investment landscape. It explores how SFDR 2.0 could address current challenges faced by investors, such as flexibility and prescriptive requirements, as well as the need for clearer product classifications. The article highlights the growing demand for sustainable real estate and the opportunities it presents, concluding with an emphasis on the importance of staying compliant with SFDR while leveraging commercial opportunities.