Proposed Changes to SFDR Annexes and Other Proposals From the ESAs’ Amendments to the SFDR RTS
On 4 December 2023, the European Supervisory Authorities (“ESAs”) published their “Final Report on draft RTS on the review of PAI and financial product disclosures in the SFDR Delegated Regulation” (the “Final Report”) in which they have proposed a number of key changes to the regulatory technical standards to the Sustainable Finance Disclosures Regulation (the “SFDR RTS”).
Key Proposal – Simplification of SFDR Annexes
Most significantly, the ESAs propose to simplify Annexes II and III (the “Pre-Contractual Annexes“) and Annexes IV and V (the “Periodic Reporting Annexes“) to the SFDR RTS (together, the “SFDR Annexes“). The proposed changes to the SFDR Annexes arise from consumer feedback and the ESAs’ supervisory work and aim to simplify the language used in the SFDR Annexes, restructure the information provided and avoid repetition.
- the ESAs have proposed the introduction of a dashboard to provide key information on the first page of the SFDR Annexes. The dashboard will address four elements – sustainable investments, Taxonomy-aligned investments, consideration of principal adverse impacts (“PAIs”) and reduction targets for greenhouse gas (“GHG”) emissions. This dashboard will also need to be included in the summary of the website disclosure required under Article 10 of SFDR;
- the ESAs have clarified that only the size and font type of the characters used in the SFDR Annexes can be adapted and no changes to the icons or colours shall be permitted;
- the SFDR Annexes must be in machine-readable format, with information marked up using the XBRL markup language;
- for financial products categorised as Article 8 under SFDR, the relevant Pre-Contractual Annex and Periodic Reporting Annex shall contain the following warning: The product has limited sustainability characteristics, certain investments could be harmful for the environment or people;
- for products making sustainable investments, the manner in which the proportion of sustainable investments has been calculated must be disclosed in the SFDR Annexes and as part of the website disclosure required under Article 10 of SFDR.
Key Proposal – Do No Significant Harm
As a result of the European Commission’s consultations on SFDR referred to below, the ESAs have decided not to make or suggest long-term revisions to the do no significant harm (“DNSH”) principle.
However, the ESAs propose that the website disclosure required under Article 10 of SFDR shall now include the thresholds and/or criteria for the PAI indicators that the financial product uses to determine that its sustainable investments comply with the DNSH principle.
In addition, the ESAs have clarified that any investments in Taxonomy-aligned economic activities shall be automatically considered sustainable investments within the meaning of SFDR.
Other Key Proposals
The Final Report proposes the following other key proposals:
Social PAI Indicators
The ESAs have proposed several new mandatory social PAI indicators, namely:
- earnings by companies from non-cooperative tax jurisdictions whose total consolidated revenue exceeds €750 million for each of the last two financial years. This will only apply to investee companies in scope of the EU Accounting Directive;
- exposure to companies active in the cultivation and production of tobacco;
- employees earning less than an adequate wage,
in addition to minor changes to other PAI indicators to ensure consistency with the European Sustainability Reporting Standards.
The ESAs have proposed additional optional social PAI indicators, namely:
- interference in the formation of trade unions;
- excessive use of non-guaranteed hour employees in investee companies;
- excessive use of temporary contract employees in investee companies;
- excessive use of non-employee workers in investee companies;
- insufficient employment of persons with disabilities within the workforce;
- lack of remediation mechanisms for affected communities relating to the operations of the investee companies; and
- lack of remediation handling mechanisms for consumers/end-users of the investee company.
In addition to a number of further technical adjustments which are detailed in the Final Report, “Lack of processes and compliance mechanisms to monitor compliance with OECD Guidelines for Multinational Enterprises or the UN Guiding principles, including the principles and rights set out in the eight fundamental conventions identified in the ILO declaration and the International Bill of Human Rights” will be an optional PAI indicator rather than a mandatory PAI indicator.
Changes to the PAI Reporting Framework (for entities to which Article 4 of SFDR applies)
In addition to the introduction of new PAI indicators, the Final Report introduces two changes to the existing PAI reporting framework. The share of PAI based on data from investee companies and the share that is estimated (or reasonably assumed) should be disclosed. All formulae for calculating PAI shall be adjusted to reflect the changes in the indicators and new formulae shall be introduced.
GHG Emissions Reduction Targets (for products to which Article 9(3) of SFDR applies)
The Final Report also introduces new rules for financial products that incorporate GHG emissions reduction targets as their investment objective and a new section in the SFDR Annexes and website disclosures. These rules will apply to financial products currently in scope of Article 9(3) of SFDR and shall not apply where a financial product (generally classified as Article 8 under SFDR) commits to report on GHG emissions of investee companies but does not commit to an objective of reducing carbon emissions.
For financial products that passively track an EU Climate Transition or Paris-Aligned Benchmark, the requirements will be less detailed than for financial products that do not passively track such benchmarks. The requirements for financial products that are not passively managed are as follows:
- the Pre-Contractual Annexes for in-scope financial products should provide information on the type of outcome the financial product is committing to achieve, the level of ambition of the target(s) and in particular on the alignment of the target with the goal of limiting global warming to 1.5 degree Celsius, and how the investment strategy will help deliver on the target(s). The Pre-Contractual Annexes will include a list of possible approaches to GHG emissions reduction from which the manner in which the target(s) will be achieved should be selected;
- the Periodic Reporting Annexes for in-scope financial products should provide information on progress to date and should explain how the investment strategy contributed to such progress as well as identifying the potential delays in achieving the target(s) and potential adjustments needed. The Periodic Reporting Annexes may also include reporting on the volumes of carbon credits purchased and cancelled during the relevant reporting period; and
- the website disclosure required under Article 10 of SFDR should provide more detailed information on GHG emissions reduction targets which should be cross-referred to in the SFDR Annexes.
The ESAs prescribe that GHG emission reduction targets are set in terms of financed GHG emissions. Complementary metrics may be used and disclosed as part of the website disclosure. GHG emissions reduction targets must be set on the basis of all relevant investments which should include the following assets classes: listed equity and corporate bonds, sovereign bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages and motor vehicle loans, in addition to such other assets classes deemed relevant.
Timing and Application
While the European Commission has three months to review and endorse the Final Report (which would be in or around March 2024), we understand that the endorsement of the Final Report may be delayed until Q3 2024. Following endorsement by the European Commission, the European Parliament and the Council will also need to approve the proposed changes and so the changes set out in the Final Report are not expected to enter law before Q4 2024 with an effective date in 2025.
The proposed amendments to the SFDR RTS set out in the Final Report will apply independently of any changes to SFDR that may result from the European Commission’s public and targeted consultations seeking feedback on SFDR which closed on 15 December 2023.
Once effective, the proposed changes set out in the Final Report will require the SFDR Annexes to be recast in the form of the amended templates and in a machine-readable format. Depending on how SFDR Annexes are currently produced, the requirement for a machine-readable format may be onerous and require advanced engagement with third party service providers.
In addition, existing SFDR Annex disclosures relating to sustainable investments, DNSH and the consideration of PAI under Article 7 of SFDR and for funds classified as Article 9(3) under SFDR will need to be reviewed and, in some cases, enhanced. These enhancements may require additional information from investee companies/issuers either directly or through third party data providers to prepare the SFDR Annexes in this way.
The Pre-Contractual Annexes will need to be filed with the Central Bank though the method of filing, and how this may be affected by the requirement for the Pre-Contractual Annexes to be in a machine-readable format, will need to be confirmed by the Central Bank in due course.
For more information on this topic please contact your usual contact or any member of the Asset Management and Investment Funds Group.
 The ESAs conducted qualitative consumer testing in Italy, Poland, France and the Netherlands between April and June 2023.
 The ESAs have proposed the insertion of Article 17A which sets out the two ways to calculate the proportion of sustainable investments, i.e. whether an investment qualifies as a sustainable investment at the level of the investment’s underlying economic activities (an assessment of which of the underlying activities qualify) or at the level of the investment itself (an assessment of the investment’s overall activities).
 “Non-respect of OECD Guidelines for Multinational Enterprises or the UN Guiding Principles including the principles and rights set out in the eight fundamental conventions identified in the ILO Declaration and the International Bill of Human Rights” remains a mandatory PAI indicator.