As part of the European Commission’s Action Plan on financing sustainable growth of March 2018 (the “Action Plan”), Regulation (EU) 2019/2088 on Sustainable Finance Disclosure Regulation (SFDR) aims to provide greater transparency on the degree of sustainability of financial products to actually channel private investment towards sustainable investments. Its phase-in implementation started from 10 March 2021. Some of the EU taxonomy requirements will also help to achieve this purpose by requiring those financial products to disclose to what extent they invest in environmentally sustainable economic activities.
The SFDR defines and introduces transparency requirements on financial products’ characteristics that can be used and compared to assess their degree of sustainability:
- Consideration of sustainability risks that are risks of loss of value of underlying assets due to environmental or social events;
- Sustainable investments in economic activities that contribute to environmental or social objectives. They include investments in EU-taxonomy eligible economic activities;
- Consideration of Principal Adverse Impacts (PAI) on sustainability factors which are the negative effects on environmental, social and employee matters as well as respect for human rights, anti-corruption and anti-bribery resulting from an investment decision.
The regulation applies from 10 March 2021 to financial products listed below and extends to their product manufacturers and their financial advisers who are located in the EU:
- Portfolio managed by credit institutions or investment firms
- Alternative investment funds (AIFs) and UCITs
- Insurance-based investment products (IBIPs)
- Pension products, workplace pensions products regulated under the IORP directive and PEPP
Disclosure obligations that must be supplemented and further specified by Regulatory Technical Standards (RTS) (such as statement on consideration of PAI indicators for large product manufacturers, pre-contractual and periodic information for financial products” promoting ESG characteristics “or “investing in sustainable investments”) will only apply the principle-based requirements from 10 March 2021 until the application date specified in these RTS.
From 10 March 2021, all in-scope financial products will have to disclose in pre-contractual documents how they consider sustainability risks and the expected impact on the return of the product. Their product manufacturers and advisers will have to disclose information on the integration of sustainability risks in the investment decisions-making process or the investment advice process as well as information on how remuneration policies are consistent with the integration of sustainability risks.
Financial products “promoting ESG characteristics” or “investing in sustainable investments” must disclose in pre-contractual documents detailed information on those characteristics or investment objectives and associated sustainability indicators and in periodic reports information on how they have been attained.
How Principal Adverse Impacts (PAI) on environmental and social matters resulting from an investment decision are considered must be disclosed by financial market participants on a “comply or explain” basis from 10 March 2021 and on a mandatory basis for entities subject to the Non-financial information Reporting Directive  (NFRD) at entity level from 30 June 2021, in a specific statement that will include PAI indicators from 30 June 2023 and in the periodic reports of financial products they manage from 30 December 2022.
Financial market participants must disclose how Principal Adverse Impacts (PAI) on environmental and social matters resulting from an investment decision are considered on a “comply or explain” basis from 10 March 2021. For entities subject to the Non-Financial information Reporting Directive  (NFRD), PAI must be disclosed at the entity level from 30 June 2021 in a specific statement that will include PAI indicators from 30 June 2023 and in the periodic reports of financial products they manage from 30 December 2022.
Financial products that do not claim to achieve any degree of sustainability may face marketing difficulties as they will have to clearly disclose in their pre-contractual documents that they do not consider sustainability risks, PAI on sustainability factors or EU taxonomy criteria that define environmentally sustainable economic activities. Moreover, under MIFID II amendments that will be adopted in Q1 2021, those products would no longer be advised to clients that have expressed ESG preferences.
On 2 February 2021, the ESAs published a draft Regulatory Technical Standards (RTS) that further specifies the ESG data required to meet the transparency requirements. These RTS must still be subject to the endorsement of the EC and to a 3-month scrutiny period by the EU Parliament and the Council. The draft RTS specify:
- The content of the statement on PAI to be produced at entity level and the mandatory PAI indicators will only have to be published for the first time from 30 June 2023 for a reference period which is the calendar year 2022
- The details of pre-contractual and periodic disclosures for financial products promoting environmental or social characteristics or products having sustainable investment objective, to be published from 1 January 2022. However, to enable financial market participants to adapt and gather the necessary information for periodic reports, the ESAs recommended that RTS periodic reports requirements would only apply for reference periods starting from 1 January 2022 in the event that the RTS are not adopted before end of June 2021
BNP Paribas Securities Services’ view
The main issue raised by product manufacturers is that they are required to access ESG data that are not made publicly available by investee companies and are therefore costly and may be unreliable. This issue could be partially resolved with a EC proposal for the review of the NFRD expected towards the end of April 2021 with an implementation date at the earliest in January 2023, and by the adoption of a legislative proposal in Q3 2021 to create a European Single Access Point that will provide EU-wide access to all relevant information (including on sustainability) disclosed to the public by companies, as put forward by the EC in its new Capital Markets Union (CMU) action plan.
It is important to note that all information would be provided in comparable digital formats.
29 December 2019 – Entry into force
2 February 2021 – Finalisation of ESAs RTS on PAI indicators to be disclosed by product manufacturers with 500+ employees and pre-contractual and periodic information to be disclosed by financial products promoting ESG characteristics or investing in sustainable investments
10 March 2021 – First application date for the disclosure requirements at entity level and in pre-contractual documents at product level in accordance with the principle-based requirements of the regulation
30 June 2021 – Disclosure by product manufacturers (500+ employees) of their policies on consideration of PAI on sustainability factors
1 January 2022 – For financial products with ESG characteristics or objective in sustainable investment, first application date for the disclosure requirements in periodic reports at least in accordance with the principle-based requirements of the Regulation and for requirements specified in RTS
1 January 2023 – Disclosure of consideration of adverse sustainability impacts for financial products of large product manufacturers
30 June 2023 – Disclosure of PAI indicators by large product manufacturers
 In 2014 the EU agreed Directive 2014/95/EU (the Non-Financial Reporting Directive or NFRD), an amendment to Directive 2013/34/EU (the Accounting Directive). The NFRD requires certain companies to report information regarding environmental, social and employee issues, human rights, and bribery and corruption, on an annual basis. The NFRD applies to large listed companies, banks and insurance companies with more than 500 employees. Companies under the scope of the NFRD had to meet these reporting requirements for the first time in 2018, for information covering financial year 2017.