On 4 December 2023, the European Supervisory Authorities (“ESAs”) published a final report setting out proposals to amend the draft regulatory technical standards (“RTS”) to Commission Delegated Regulation 2022/1288 (the “SFDR Delegated Regulation”).
The final report responds to a mandate sent by the European Commission (“Commission”) in April 2022 to review certain aspects of the operation of SFDR Delegated Regulation including the disclosures of principal adverse impacts (“PAI”) of investment decisions on sustainability factors and to introduce disclosure of financial products’ decarbonisation targets. The ESAs published a consultation paper in April 2023 and having considered the feedback to the consultation the ESAs have adjusted the draft RTS in several areas.
The purpose of the ESAs review is to extend and simplify sustainability disclosures.
Main proposed changes to the SFDR Delegated Regulation
Extension of the list of social indicators for principal adverse impacts
The final report presented mandatory social indicators for PAI such as, for instance, but not limited to:
- the "amount of accumulated earnings in non-cooperative tax jurisdictions applying to investee companies where the total consolidated revenue on their balance sheet date for each of the consecutive financial years exceed a total of EUR 750 Mio" (this by adjusting the title of the indicator to make it clear that it only applies to companies in scope of the Accounting Directive (Directive 2013/34/EU)).
- the "exposure to companies active in the cultivation and production of tobacco". This addresses the uncertainty about what "involvement" means.
The ESAs also made further changes to the list of newly proposed opt-in social indicators such as, for instance, but not limited to:
- Interference in the formation of trade unions or elections of workers representative. Some concerns were raised around the data point of this indicator and hence this was the reason why the ESAs decided to include this in the list of opt-in indicators.
The ESAs did also make some technical adjustments to other indicators in table 3 and made some changes to other PAI.
Changes to PAI framework
An important structural question was carefully examined by the ESAs in their consultation as regards the basis on which the PAI indicators are calculated, whether on “all investments” (as currently in the SFDR Delegated Regulation) or “relevant investments”. The ESAs opted not to change the calculation basis.
As regards, “disclosure of share of estimates”, the ESAs believe, that the best practice following which the share of the PAI based on data from investee companies and the share that is estimated should be disclosed, should be reflected in the legal text of the SFDR Delegated Regulation. Hence the financial market participant making the PAI disclosure should disclose what share of the adverse impact was based on data from the investee company and what was estimated or subject to reasonable assumptions.
DNSH disclosure design options
In the light of potential changes coming in the future, the ESAs have decided not to make any changes for the moment. The draft RTS will nevertheless include a requirement to disclose the thresholds or criteria for the PAI indicators that the financial product uses to determine that its sustainable investments comply with the DNSH principle in the website disclosure.
As regards disclosure related to “safe harbour”, the ESAs confirmed the existence of such safe harbour for any investments in taxonomy-aligned economic activities that will automatically be considered sustainable investments.
Amendments regarding GHG emissions reduction targets
The ESAs have received the mandate from the Commission to develop draft RTS that incorporate new disclosures for financial products information provided “in pre-contractual documents, on websites and in periodic reports on GHG emissions reduction targets including intermediary targets and milestones and actions pursued”.
Such disclosures aim to help deliver on the Commission’s objective to improve target-setting, disclosure and monitoring of the financial sector’s commitments.
The new disclosures apply to products having GHG emissions reduction as their investment objective under Article 9(3) SFDR. For products that passively track EU Climate Transition or Paris-Aligned Benchmarks a simplified disclosure applies.
Such new disclosures are meant to provide comprehensible information to investors and will affect pre-contractual documents, but also periodic reports and the website of the financial market participants (“FMP”).
FMP will be asked to provide information about the way the target will be achieved or what is their approach to reducing financed GHG emissions.
Simplifications of the templates
Templates have been updated by simplifying the language and restructuring information provided to avoid repetitions.
ESAs in order to make the disclosures more understandable have introduced a dedicated “dashboard” to provide key information. Four essential elements are included in the dashboard: sustainable investments, taxonomy-aligned investments, PAI consideration, and GHG emissions reduction targets.
Next steps
The Commission will review the final report and decide whether to endorse them within three months. The revised RTS would be applied independently of the comprehensive assessment of the SFDR announced by the Commission in September 2023 and before changes resulting from that assessment would be introduced. Any amendments to the SFDR Delegated Regulation that would be adopted by the Commission following this final report must be published in the official journal of the EU.
As a consequence, the amended RTS are hence not expected to enter into effect before Q2 2024 at the earliest.
Share on
