November 5, 2024

Navigating EU taxonomy, CSRD, and SFDR for financial services

Financial services enterprises doing business in the European Union (EU) face increasing regulatory pressure due to the increase in sustainability regulations passed to address the climate crisis.

Among the most prominent regulations impacting IT infrastructure and reporting are:

EU Taxonomy: Details a classification system for environmentally sustainable activities, guiding investments that support a low-carbon economy.
Corporate Sustainability Reporting Directive (CSRD): Strengthens requirements for companies to report on their social and environmental performance, aligning with the European Green Deal.
Sustainable Finance Disclosure Regulation (SFDR): Requires financial institutions to disclose how they integrate sustainability into their investment strategies, helping investors identify sustainable investments.

These regulations, including the EU Sustainability Reporting Standards (ESRS) and SFDR regulation, have introduced two key challenges for IT leaders in financial services:

How can enterprises create more sustainable IT infrastructure that aligns with environmental goals?
How can enterprise IT leaders ensure compliance with complex sustainability reporting requirements, such as CSRD reporting and SFDR disclosures?

Enterprises of all sizes can find it confusing to determine how these regulations will affect them. As financial services increasingly deploy resource-intensive applications like artificial intelligence (AI), the need for sustainable energy solutions becomes critical.

However, IT leaders can set themselves up for success by understanding the goals of these sustainability regulations and making strategic partnership decisions that can help reduce reporting complexity.

Evolving sustainability regulations in the EU: CSRD, SFDR, and beyond

Three of the top sustainability regulations that are crucial for IT leaders in the EU financial services sector are the EU Taxonomy, Corporate Sustainability Reporting Directive (CSRD), and the Sustainable Finance Disclosure Regulation (SFDR).

EU Taxonomy

The EU Taxonomy is a classification system that helps companies and investors identify "environmentally sustainable" economic activities to make sustainable investment decisions. By offering a clear framework, the EU Taxonomy is meant to be a tool to help investors identify and promote a transition to a zero-carbon future. It can also help guide funding toward solutions that tackle the climate crisis.

Corporate Sustainability Reporting Directive (CSRD)

The CSRD directive aims to further measure the "sustainability performance of companies, as part of the European green deal." The goal of CSRD is to modernize and strengthen the rules concerning the social and environmental information that enterprises have to report, improving the quality and scope of corporate sustainability reporting by requiring companies to provide more comprehensive disclosures about their environmental and social impacts. CSRD reporting aligns with the EU Sustainability Reporting Standards (ESRS), which outline specific guidelines for businesses to follow, ensuring transparency and accountability.

Sustainable Finance Disclosure Regulation (SFDR)

For the financial services industry, the SFDR regulation requires these institutions to provide transparency on their sustainability risk in their investment processes and products. This includes asset managers, hedge funds, investment bankers, and more. This regulation aims to provide investors with clear information on the sustainability of their portfolios and encourages more responsible investment practices.

Creating more sustainable IT infrastructure in financial services

As financial services enterprises work to meet these regulatory demands, IT leaders must adopt a holistic approach to sustainability, focusing not just on compliance but also on minimizing the environmental impact of their IT infrastructure. This requires significant attention to data centers, which power many of the applications driving modern financial services.

Data allows enterprises to innovate and scale their technologies to better meet their customers' needs. However, all this data processing, especially from high-performance computing (HPC) and AI applications, consumes energy and contributes to the associated emissions that can contribute to climate change. This increase in resource consumption is one reason IT leaders should consider the sustainability of their data center partners.

For us, sustainability isn't only good for the planet — it’s good for business. Resource efficiency has repeatedly proven itself to have business value because using water and electricity more efficiently saves money and aligns with our customers’ priorities.

Our sustainability programs include:

Complying with sustainability regulations: Simplifying reporting

Fragmented IT architectures deployed over time across multiple data center vendors may complicate compliance with the increase in regional sustainability and regulatory requirements.

A strategic approach can help enterprises ensure compliance across their footprint and enable more streamlined reporting. 

Complying with complex and evolving regulations like the CSRD directive and SFDR regulation can be daunting, especially when enterprises operate across multiple regions and with diverse data center vendors. CSRD reporting mandates the disclosure of social and environmental impacts, and fragmented IT infrastructures can complicate this process.

By centralizing IT infrastructure on platforms like our PlatformDIGITAL®, enterprises can reduce the number of vendors they need to work with regarding compliance. This, in turn, can save time so that IT leaders can focus on business-critical objectives, like adopting new AI applications that extract value from data.

A unified approach to sustainability in IT infrastructure can save time and resources, allowing IT leaders to focus on innovation rather than regulatory complexity.

We're committed to reaching ambitious targets for sustainable data centers, and we’ve dedicated an internal team to gather the latest information about evolving requirements. This is to ensure we are in a position to act positively to address sustainability and share insights with our partners.

Prioritizing sustainability in your IT infrastructure strategy

As financial services enterprises increasingly prioritize sustainability, the choice of IT infrastructure and data center partners becomes critical. As more and more data is processed, connected, and stored, financial services enterprises will continue to look for ways to offset their environmental impact. Choosing partners who align with your sustainability goals and meet the requirements of regulations like the CSRD and SFDR is essential.

At Digital Realty, we're committed to resource efficiency and the transition to a low-carbon future. This is demonstrated through regular and transparent communication with stakeholders and is documented in our annual Environmental, Social, and Governance Report (ESG).

Take the next step in your sustainability journey

To learn more about how our global data center platform can help your enterprise meet the demands of CSRD reporting, SFDR compliance, and other sustainability regulations, visit our ESG page or reach out to us for more information on our sustainable data center solutions.

FAQs

What is the Corporate Sustainability Reporting Directive (CSRD)?
The CSRD is an EU regulation that requires companies to disclose more detailed information about their environmental and social impacts. It builds on the Non-Financial Reporting Directive (NFRD) and aims to improve transparency and accountability in corporate sustainability efforts. CSRD reporting is aligned with the EU’s sustainability goals, including addressing climate change and promoting socially responsible practices.

Who does the CSRD apply to?
The CSRD applies to large EU-based companies, including financial services institutions and certain non-EU companies that operate within the EU. Specifically, it affects companies that meet two out of the following three criteria: having over 250 employees, generating more than €40 million in annual revenue, or possessing over €20 million in total assets. The directive also extends to publicly listed small and medium-sized enterprises by 2026.

What is the difference between CSRD and SFDR?
The CSRD focuses on the reporting requirements for companies regarding their social and environmental impacts, particularly around climate change and sustainability. It is applicable to a wide range of industries, including financial services.

The SFDR specifically targets financial institutions, requiring them to disclose how sustainability risks are integrated into their investment decisions. It aims to increase transparency on sustainable investments and help investors make informed choices.

How does the CSRD impact IT infrastructure?
The CSRD impacts IT infrastructure by introducing the need for companies to report on sustainability metrics that require robust data collection, management, and reporting capabilities. IT leaders need to ensure that their infrastructure can support accurate and compliant data processing, particularly as companies adopt more energy-intensive technologies like AI. Sustainable IT infrastructure, such as energy-efficient data centers, plays a crucial role in meeting the directive's requirements.

What is the EU Taxonomy and how does it relate to CSRD and SFDR?
The EU Taxonomy is a classification system that identifies which economic activities can be considered environmentally sustainable. It is closely linked to the CSRD and SFDR, as it provides a framework that helps companies and investors assess whether their activities or investments align with EU sustainability goals. Under CSRD, companies may need to report how their activities align with the EU Taxonomy, while SFDR requires financial institutions to disclose how their investment products meet Taxonomy criteria.

What are the EU Sustainability Reporting Standards (ESRS)?
The ESRS are a set of guidelines created under the CSRD that outline what information companies should include in their sustainability reports. These standards ensure consistency and comparability in sustainability reporting across industries, covering areas such as environmental impact, social responsibility, and governance practices.

How can companies ensure compliance with CSRD reporting requirements?
To ensure compliance with CSRD reporting requirements, companies should take a strategic approach by centralizing their data collection and reporting processes. Partnering with data center providers like Digital Realty can help simplify compliance by ensuring that IT infrastructure supports sustainability goals, streamlines data collection, and reduces the complexity of working with multiple vendors. Additionally, companies should stay informed about evolving regulations and standards, such as the ESRS.

What are the benefits of sustainable IT infrastructure?
Sustainable IT infrastructure offers several benefits, including reduced energy consumption, lower operational costs, and a smaller environmental footprint. For companies complying with regulations like the CSRD and SFDR, sustainable infrastructure also simplifies reporting by ensuring that data centers and IT resources align with environmental goals. Additionally, resource-efficient solutions, such as renewable energy sources and liquid cooling systems, enhance operational efficiency while helping businesses meet sustainability targets.

How does SFDR affect financial institutions?
The SFDR affects financial institutions by requiring them to disclose how they integrate sustainability risks into their investment processes. This includes transparency on the environmental and social impacts of their investments. Financial institutions must categorize their products based on sustainability criteria, providing investors with clear information to make informed decisions about sustainable finance.

How can Digital Realty help with sustainability regulation compliance?
Digital Realty offers solutions that help enterprises comply with sustainability regulations like the CSRD and SFDR. By leveraging PlatformDIGITAL®, enterprises can centralize their IT infrastructure, reducing the number of vendors and simplifying reporting requirements. Digital Realty also prioritizes resource efficiency through renewable energy sourcing, liquid cooling for AI deployments, and waste heat reuse initiatives, aligning with EU sustainability goals.

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