European Authorities Attempt to Clarify SFDR

    Stockholm (NordSIP) – The start date for adopting the Sustainable Finance Disclosure Regulation (SFDR) as laid out in the Delegated Regulation adopted by the European Commission on 6 April 2022 is quickly approaching. Financial market participants are scrambling to assess and implement the regulatory framework in anticipation of the application deadline, 1 January 2023.

    To help along in this process, on 2 June, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and  Markets Authority (ESMA), collectively known as the European Supervisory Authorities (ESAs), published a joint clarification statement. It is yet another effort from the ESAs to provide much-needed interpretations on the draft regulatory technical standards (RTS) issued under the SFDR, including the financial product disclosures under the Taxonomy Regulation.

    One of the key areas covered by the statement is the disclosures related to principal adverse impact (PAI), admittedly one of the most challenging elements of SFDR. The ESAs clarify that it is possible to use the PAI indicators to measure the environmental or social characteristics as well as the overall sustainable impact of a financial product. The authorities also provide a table with three possible uses of the PAI indicators at financial product level.

    The ESAs note that several market participants have raised questions about the PAI calculation methodology in the context of periodic disclosures of financial products. Accordingly, they provide some details on the rules for calculating the PAIs. The statement also sheds some clarity on the look-through approach and investment instrument scope for PAI disclosures. The ESAs state that all investments, both direct and indirect, should be included in calculations to be made as part of the reporting on PAI of investment decisions.

    “While helpful to beef up the classification of products, it [ESA’s statement] does pose a number of questions for the future,” comments Victor van Hoorn, Executive Director at Eurosif (outgoing), in a LinkedIn post. “What is ‘good enough’ when no PAI thresholds exist? Is PAI improvement over time achieved through organic improvements to investee companies (with stewardship) or via exclusion/divestment?”

    Other areas that the statement provides guidance on are adverse impact indicators, pre-contractual financial product disclosures, periodic financial product disclosures, taxonomy-related financial product disclosures, ‘do no significant harm’ (DNSH) disclosures and disclosures for financial products with investment options. The statement also includes some clarifications on disclosures for direct and indirect investments in pre-contractual and periodic disclosures.

    Hopefully, the latest clarification effort from the ESA will help financial market participants to disentangle this complex and technically challenging area. A more comprehensive set of formal Q&As on the practical application of sustainability disclosure rules is in the making. According to the preliminary schedule, it will be issued after the delegated regulation laying down the SFDR RTS is published in the Official Journal in July.

    Image courtesy of Karla Hernandez on Unsplash
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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