SFDR technical standards report: ‘The EC needs to shed further light’

Asset managers need more clarity around scope for Article 8 and 9

The responsible investment industry has welcomed the European Supervisory Authorities (ESA) Final Report and draft Regulatory Technical Standards (RTS) in enabling “consistent and comparable [ESG] data”, but said there are some grey areas the European Commission (EC) needs to address in its three-month approval period.

Last week, the three entities making up the ESA, European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and European Securities and Markets Authority (ESMA) delivered the Final Report to the EC including draft RTS on content, methodologies and presentation under the Sustainable Finance Disclosure Regulation (SFDR).

Steven Maijoor, chair of the ESA’s joint committee, said: “The significant set of rules issued today provide a strong basis to improve ESG reporting and combat greenwashing. They strike a careful balance between achieving common disclosures across the range of financial products covered by the SFDR and recognising that they will be included in documents that are very diverse in length and complexity. The ESA has listened to the consultation feedback from stakeholders and adjusted the proposed disclosures.”

Main proposals

Following stakeholder feedback, the ESA’s statement said it had come up with the draft RTS with the aim of strengthening protection for end-investors by improving ESG disclosures surrounding the adverse impact their investments can have on the sustainability features of a wide range of financial products.

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Entity-level principal adverse impact disclosures

The RTS suggests the principal adverse impact investment decisions have on sustainability factors should be disclosed on the organisation’s website with the following elements included in the statement:

  • Climate and environment
  • Social and employee matters
  • Respect for human rights
  • Anti-corruption
  • Anti-bribery

The ESA has updated the list of indicators for principal adverse impacts. Julia Vergauwen, managing associate within the investment funds arm at Linklaters explained: “One of the major discussion points [in the lead-up to the publishing of the draft RTS] has been the consideration by the asset managers of the principal adverse sustainability impacts indicators in their investment decision-making process and ex-post reporting to investors against such indicators. After all, the exercise requires the right amount of quality data that isn’t always there.

“The mandatory principal adverse sustainability impacts indicators have now been reduced from 32 to 14 for ‘normal’ investee companies, to two for investments in sovereigns and supranational, and to two for investments in real estate assets. This means some indicators have been moved from the mandatory list to the optional list of indicators.”

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Furthermore, real estate and sovereign/supranational investment-related principal adverse sustainability indicators are now included, which Vergauwen said is “a welcomed change considering the distinctive nature of such investments”.

The ESA summary added the principal adverse impact reporting in the SFDR is based on the principle of proportionality – for companies with fewer than 500 employees, the entity-level principal adverse impact reporting applies on a comply-or-explain basis.

Product level disclosures

The updated RTS states the “sustainability characteristics or objectives of financial products are to be disclosed in an annex to the respective sectoral pre-contractual and periodic documentation in mandatory templates and on providers’ websites”.

These proposals relate to:

  • Pre-contractual information should include details on how a product with environmental or social characteristics/sustainable investment objectives meets those characteristics or objectives.
  • Information on the environmental or social characteristics of financial products/sustainable investment objective of the product and the methodologies used on the entity’s website .
  • Periodic reports specifying: (I) the extent to which products met the environmental and/or social characteristics using the list of relevant indicators; and (II) for products with sustainable investment objectives, including products whose objective is a reduction in carbon emissions.
  • Information in relation to the ‘do not significantly harm’ principle: specifying the details for how sustainable investments within the product do not have an adverse impact.

The industry had also previously called for clarity around the scope of Article 8 under SFDR, funds that “promote environmental or social sustainability” or considered ‘light green’ and Article 9 – funds that have sustainable investment as an objective or ‘dark green’. In January, the ESA’s chair Maijoor wrote to the EC asking for further clarification.

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But Linklaters’ Vergauwen said while this has been addressed in the Final Report, further clarity is needed: “Another major point of discussion has been the scope of Article 8 products, i.e. from when does a financial product under Article 8 of SFDR need to comply with additional disclosure obligations?

“Article 8 classification has been clarified to a limited extent in the Recitals of the new draft (e.g., consideration of principal adverse sustainability impacts can now qualify a financial product as Article 8 product) but in my view we still need to wait for the EC to shed further light as the ESA does not have the legal power under the SFDR to address this point.”

She also highlighted the same applies for the scope of Article 9; it is addressed in the report, but the EC needs to “give more clarification”.

Taxonomy link

An “interesting change” in the new RTS is the link between the SFDR and the Taxonomy Regulation, introducing “double materiality requirements”.

Vergauwen explained: “For an investment to qualify as ‘sustainable’ it now needs to comply with the minimum safeguards requirements set out in the Taxonomy Regulation, in addition to the “do no significant harm” requirement under the SFDR.

Next steps

European financial market participants are required to comply with most of the SFDR provisions from 10 March 2021. However, the application of these latest RTS, which the EC is expected to endorse within three months, should be in place by 1 January 2022.

However, Linklaters’ Vergauwen said she hopes the EC uses the three-month period to address some grey areas such as the scope of Article 8 and Article 9 of the SFDR.


Following its exit from the European Union, the UK has decided not to to implement the SFDR into UK law. However, many are anticipating an equivalent to be implemented by the Financial Conduct Authority (FCA) and the regulator is expected to release a consultation paper some time in Q1 2021.

Paul Anderson, a financial services regulatory partner at global law firm Squire Patton Boggs, commented: “It seems likely the UK will have regard to SFDR because there will be UK firms and funds that are still marketing or selling in Europe post-Brexit. Broadly, the UK and EU will be tackling the same concerns. The UK government has made no secret about its intentions to put green finance high on its agenda.”

In November last year, UK chancellor Rishi Sunak announced the UK will be the first country in the world to make disclosures that are aligned with the Task Force on Climate related Financial Disclosures (TCFD) fully mandatory by 2025.

Anderson pointed out that for asset managers, the FCA is consulting in H1 2021 on potential TCFD-aligned client disclosure rules, aimed at providing ESG information at the firm, fund, and portfolio level to aid decision-making for investors. “That nascent UK regime is therefore likely to overlap substantially with SFDR,” he said.

“For new fund launches (AIFs / UCITS) we see the FCA taking care to understand the investment objectives and policies where ESG is mentioned,” Anderson continued. 

“This may mean fund applications in this sector are examined in even greater detail but overall, the industry will welcome greater clarity and consistency in disclosure and description. Industry guidance has appeared, and high-quality ESG disclosure will quickly gain traction and best practice will quickly emerge. 

“Both the FCA and industry participants, such as the Investment Association, should be complimented on their approach… it is not the case of telling people off for doing it wrong, more positively developing a new industry sector in line with both commercial and regulatory objectives… we don’t see a reason why they should conflict.”


Hari Bhambra, global head of compliance solutions at Apex Group, said the SFDR implementation on 10 March represents a starting point for many when it comes to ESG data disclosure.

She said: “The key takeaway from this report is the standardisation of the disclosures (and quantification of the impact indicators), which will lead to improved and informed decision making and drive positive change. In order to reorient capital flows towards sustainable investment, we need to remove information asymmetries through clear, consistent and harmonious disclosures to enable informed decision making by investors. This report provides useful direction that managers need on Principal Adverse Impact, E and S characteristics, and sustainable investment.

“The detail set forth by the ESA in terms of the template disclosures and evaluations to quantify adverse impact, including look-through to investee companies, will enable consistent and comparable data to promote transparency and long termism. Most significantly, it will bring a change in the manner in which companies, from financial market participants and financial advisers to investee entities, manage their internal operations in order to mitigate adverse financial implications and transition risk, which are anticipated from investors’ shifting investment appetite.”

Meanwhile, Remy Briand, head of ESG at MSCI, commented: “Access to quality information is the cornerstone of effective capital markets, and MSCI supports the EC’s and ESA’s endeavours to ensure market participants have a consistent set of standards that inform critical decisions within ESG investing. MSCI continues to believe that ESG disclosure requirements should focus on metrics that are intuitive, readily available, financially relevant and comparable, with the aim of driving capital towards more sustainable investments.”

Earlier this year, ESG Clarity wrote 2021 is predicted to be a turning point for responsible investment with the SFDR legislation prompting an improvement in data and disclosure. Squire Patton Boggs’ Anderson, commented: “This is one of those rare cases where parts of the financial services industry have been calling for more regulation… we have seen many cases of firms, marketeers, distributors jumping on the bandwagon of a loosely defined environmental, social and/or governance aim or objective. Regulators had begun to question the offerings fairly quickly with the EC looking at a variety of measures to implement sustainable finance.”


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...