Sustainable Finance Disclosure Regulation (SFDR) – regulation memo

SFDR aims to provide greater transparency on the degree of sustainability of financial products.


ESG Global Survey 2023

As part of the European Commission’s Action Plan on financing sustainable growth of March 2018, Regulation (EU) 2019/2088 on Sustainable Finance Disclosure Regulation (SFDR) aims to provide greater transparency on the degree of sustainability of financial products to channel private investment towards sustainable investments. 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 phase-in implementation of SFDR started from 10 March 2021.

About SFDR – Sustainable Finance Disclosure Regulation  

The Sustainable Finance Disclosure Regulation (SFDR) defines and introduces transparency requirements on financial products’ characteristics that can be used and compared to assess their degree of sustainability.

Regulatory requirements of SFDR

The regulatory requirements of SFDR focus on the transparency of:

  • 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.

Sustainable finance: our regulatory intelligence

Corporate Sustainable Reporting Directive (CSRD)

CSRD will significantly help manufacturers of financial products comply with SFDR transparency requiremenents.

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European Commission’s Sustainable Finance Action Plan

Keep track of the regulatory developments of the European Commission’s Sustainable Finance Action Plan.

Scope of SFDR – Sustainable Finance Disclosure Regulation

Financial products and product manufacturers in scope of SFDR

As of 10 March 2021, SFDR applies to the financial products listed below and extends to their product manufacturers and their financial advisers who are located in the EU:

  • Portfolios managed by credit institutions or investment firms
  • Alternative investment funds (AIFs) and UCITS
  • Insurance-based investment products (IBIPs)
  • Pension products, workplace pension products regulated under the IORP directive and PEPP

Disclosure obligations of SFDR

As of 10 March 2021, all in-scope financial products 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 have to disclose information on the integration of sustainability risks in the investment decision-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.

Consideration of Principal Adverse Impacts under SFDR

The ways in which Principal Adverse Impacts (PAI) on environmental and social matters resulting from an investment decision are considered must be disclosed as follows:

  • By financial market participants, on a “comply or explain” basis from 10 March 2021
  • By entities subject to the Non-Financial information Reporting Directive(1) (NFRD), on a mandatory basis at entity level from 30 June 2021

Disclosure including PAI indicators is done in compliance with the RTS from 30 June 2023 for financial market participants and in the periodic reports of their financial products from 30 December 2022.

Industry implications of SFDR – Sustainable Finance Disclosure Regulation

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 apply from 2 August 2022, products that do not consider PAI on sustainability factors or that do not invest in sustainable investments will no longer be advised to clients that have expressed ESG preferences.

RTS under SFDR

On 6 April 2022, the European Commission adopted the final Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation and its Annexes, including the entity-level Principal Adverse Impact (PAI) reporting template and indicators (Annex 1) and the mandatory pre-contractual / periodic templates for Article 8 and 9 products (Annex 2Annex 3Annex 4 and Annex 5). 

Those implementing texts further specify the ESG data required to meet the transparency requirements.

In April 2023, the European Supervisory Authorities (ESAs) consulted stakeholders on a review of the Regulatory Technical Standards (RTS) to improve social disclosures and product information about greenhouse gas emission reduction targets. ESAs are expected to publish their advice in Q4 2023.

Securities Services’ view

Room for interpretation remains regarding the definitions introduced by SFDR, particularly the definition of “sustainable investment.”

On 14 April 2023, the European Commission clarified that it is up to fund managers to set their own definitions of sustainable investment, providing investments fulfil three criteria (contributing to an environmental or social objective, not causing significant harm to objectives, and meeting good governance practices) and disclose their underlying assumptions.

SFDR has introduced concepts such as “sustainable investment” and “consideration of principal adverse impacts” (PAI) on social and environmental matters, which have created legal uncertainty for financial market participants. Therefore, a comprehensive assessment of SFDR started in September 2023 with a public consultation launched by the Commission. If this consultation is followed by a legislative proposal, it will only be introduced by the new elected European Commission in late 2024 at the earliest.

Another 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.

From 2025 this issue will be partially resolved with a proposal by the European Commission for the review of the NFRD published in 2021, the Corporate Sustainability Reporting Directive (CSRD), and by the adoption of a legislative proposal in Q3 2021 to create a European Single Access Point that provides EU-wide access to all relevant information (including on sustainability) disclosed to the public by companies, as put forward by the European Commission in its new Capital Markets Union (CMU) action plan. It is important to note that all information will be provided in comparable digital formats.

The proposal for a regulation on the transparency and integrity of ESG rating activities published on13 June 2023 by the European Commission would also help to improve the reliability and transparency of ESG rating providers. The proposal introduced the obligation to ensure that fees charged to clients by ESG rating providers are fair, reasonable, transparent, non-discriminatory, and based on costs.

Key dates of SFDR – Sustainable Finance Disclosure Regulation

29 December 2019 – Entry into force of SFDR

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 in consideration of PAI on sustainability factors

1 January 2022 – For financial products with ESG characteristics or objectives 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

6 April 2022 – Adoption by the European Commission of the final Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR). 

1 January 2023 – Entry into application of the RTS and disclosure in consideration of adverse sustainability impacts for financial products of large product manufacturers

30 June 2023 – Disclosure of PAI indicators by large product manufacturers

Q3-Q4 2023:
• EC consultation on a review of SFDR
• ESAs advice to the EC on the review of PAIs in the RTS.

With SFDR phase 2, are your investment compliance capabilities ready?

[1] 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.