SFDR: navigating the latest developments
Following the application of SFDR Level 1 on 10 March 2021, SFDR Level 2 requirements also came into effect on 1 January 2023. Financial market participants now have until 30 June 2023 to start disclosing their PAI statements on an annual basis. Let’s navigate through the latest SFDR developments.
The Sustainable Finance Disclosure Regulation (SFDR) is a key part of the EU Action Plan on Sustainable Finance to leverage the underlying power of capital markets to meet its carbon emissions reduction targets. It was developed to improve transparency, reduce greenwashing and support sustainable investment processes.
The latest developments regarding SFDR
Amendments to SFDR Level 2 requirements for fossil gas and nuclear activities
On 17 February 2023 the European Parliament provided their final approval on the extension of the Pre-Contractual and Periodic Disclosures and the new RTS Annexes were published in the EU Official Journal. The amendments to the SFDR Level 2 RTS with respect to fossil gas and nuclear activities came into effect on 20 February 2023.
The additional information discloses if economic activities under the Taxonomy Regulation include gas or nuclear activities and, if so, to what extent. In this context, the annex templates for Article 8 and 9 products have to be adapted with respect to the precontractual and periodic reporting information.
EU Commission adopts clarifications regarding disclosure rules on sustainable investments
The European Commission has published on 14 April 2023 responses to questions raised by the European Supervisory Authorities (ESAs) on the SFDR.
The aim of these Q&As is to help financial market participants apply the Regulation, especially in the context of the requirements of the regulatory technical standards in place since January 2023. These Q&As also contribute to clarifying the interaction between the SFDR and the different pieces of the sustainable finance framework.
Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, said: “The SFDR is the first Regulation to set rules on how financial market participants should disclose sustainability related information. The application of the SFDR requirements represents a challenge to industry and regulators and these Q&As aim to offer guidance to facilitate the proper implementation of the rules. In parallel, we will continue our comprehensive assessment of the SFDR with a focus on ensuring legal certainty, increased usability and the mitigation of greenwashing. A public consultation is planned for the autumn.”
These replies have been published by the European Supervisory Authorities in the form of Q&As.
SFDR current consultations
European Commission publishes proposal for the Green Claims Directive to combat greenwashing
On 22 March 2023, the European Commission proposed a new Directive on substantiation and communication of explicit environmental claims, the Green Claims Directive. The proposal is part of the EU’s Green Deal and is a set of common criteria to help combat greenwashing and misleading environmental claims.
This initiative will require companies to substantiate claims they make about the environmental footprint of their products/services by using standard methods for quantifying them.
The aim is to make the claims reliable, comparable and verifiable across the EU – reducing ‘greenwashing’ (companies giving a false impression of their environmental impact).
The Proposed Green Claims Directive is now subject to the approval of the European Parliament and Council must now review it over the next two years.
EU Commission’s draft Delegated Regulation on 4 environmental objectives
On April 5, the EU Commission published for consultation additional Taxonomy Delegated Acts which are expected to be finally published in June as part of a broader “Sustainability Package”.
This initiative is for a new set of EU taxonomy criteria for economic activities that contribute substantially to one or more of the following environmental objectives:
- sustainable use and protection of water and marine resources
- transition to a circular economy
- pollution prevention and control
- protection and restoration of biodiversity and ecosystems.
The Commission is also proposing targeted amendments to the Taxonomy Climate Delegated Act and to the Taxonomy Disclosures Delegated Act.
ESAs’ Consultation Paper with amendments to the SFDR Delegated Regulation
On 12 April 2023 the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published a joint Consultation Paper with amendments to the Delegated Regulation of the Sustainable Finance Disclosure Regulation.
The ESAs are proposing changes to the disclosure framework to address issues that have emerged since the introduction of SFDR. The authorities seek feedback on the amendments that envisage:
- extending the list of universal social indicators for the disclosure of the principal adverse impacts of investment decisions on the environment and society, such as earnings from non-cooperative tax jurisdictions or interference in the formation of trade unions;
- refining the content of other indicators for adverse impacts and their respective definitions, applicable methodologies, formulae for calculation as well as the presentation of the share of information derived directly from investee companies, sovereigns, supranationals or real estate assets; and
- adding product disclosures regarding decarbonisation targets, including intermediate targets, the level of ambition and how the target will be achieved.
Moreover, the ESAs propose further technical revisions to the SFDR Delegated Regulation by:
- improving the disclosures on how sustainable investments “do not significantly harm” the environment and society;
- simplifying pre-contractual and periodic disclosure templates for financial products; and
- making other technical adjustments concerning, among others, the treatment of derivatives, the definition of equivalent information, and provisions for financial products with underlying investment options.
ESAs proposed amendments to extend and simplify sustainability disclosures might lead to further changes in the EET and the creation of SFDR Annex Template documents (pre-contractual and periodic), e.g. decarbonisation targets.
The ESAs invite comments on any aspect of the Consultation Paper until 4 July 2023 via the response form.
Next steps: SFDR PAI indicators
PAI reporting on entity level (article 4 SFDR)
Financial market participants with more than 500 employees are required to disclose their first annual entity-level Principal Adverse Impact (PAI) statement under the SFDR RTS (linked to Regulation (EU) 2019/2088) by 30 June 2023. The first reference period for this first PAI statement is 1 January to 31 December 2022. Moreover it must be published on their website in an easily accessible, free of charge, non-misleading, and easy-to-read form.
By 30 June 2024, all financial market participants have to publicly disclose their PAI statements. In addition, the PAI statement shall include a comparison between the two reference periods : January to December 2022 and January to December 2023.
From 2024 onwards comparisons between reference periods shall be included in PAI statements.
How can IDS help
IDS provides a comprehensive ESG data solution for meeting all SFDR disclosure requirements. This includes, pre-contractual and periodic disclosures, website disclosures and PAI statements. Moreover, we have extensive experience in the production of SFDR KIDs and corresponding industry templates (such as the European ESG Template, EET) according to the latest regulatory guidelines.
