Introduction
The "Sustainability Finance Disclosure Regulation" or "SFDR" on sustainability‐related disclosures in the financial services sector is one of the regulatory initiatives of the EU Action Plan on Financing Sustainable Growth. It was introduced by the European Commission in 2018 and entered into force on 10 March 2021.
Its aim is to redirect capital towards a more sustainable economy, promote transparency and mainstream sustainability into risk management.
Framework legislation
The SFDR lays down harmonized rules for financial market participants and financial advisers on the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes, and the provision of sustainability‐related information with respect to financial products.
In a nutshell, the SFDR mandates enhanced disclosure requirements related to environmental, social, and governance factors for entities marketing or advising on financial products/investments across the EU. Its objective is to improve the transparency around ESG matters within the EU and to facilitate the comparison of financial products. The SFDR does apply to insurance products. Specifically, it encompasses:
- Insurance-based investment products (IBIPs)
- Pension products or pension schemes
- Pan-European private pension products (PEPP)
One of the key elements of the SFDR is the categorization of financial products into three distinct categories:
- Article 6 financial products that incorporate environmental, social, and governance aspects into the investment decision process or declare that they do not consider sustainability risks to be relevant and do not meet the additional criteria set out in Articles 8 or 9,
- Article 8 financial products that promote social and/or environmental characteristics and also invest in sustainable assets, but their primary purpose is not sustainable investment (Article 8 products take ESG characteristics into account), and
- Article 9 financial products that pursue a sustainable investment objective (eg the reduction of CO2 emissions).
Each group of financial categories is subject to different requirements under the SFDR.
Implementing measures
The transparency requirements contained in the SFDR are specified by Regulatory Technical Standards (RTS) which were introduced in the form of delegated regulations by the European Commission (CDRs). The RTS elaborate on the SFDR's stipulations by detailing the necessary disclosures about the ESG impact of investment decisions by financial market players. These standards introduce specific metrics for assessing impacts and clarify the disclosure requirements in pre-contractual documents, periodic reports, and on websites to align with the SFDR. They also guide on how to demonstrate investments' compliance with the "do no significant harm" principle regarding environmental and social goals. Thus, the RTS enhance the transparency and depth of information available to investors, aiming to provide a clearer understanding of the sustainability of financial products and prevent misconceptions about the sustainability of their investments.
In 2022, the European Commission adopted CDR (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of the content and presentation of the information in relation to the principle of "do no significant harm". It specifies the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports.
Following this, the European Commission adopted the CDR (EU) 2023/363 of 31 October 2022 amending and correcting the regulatory technical standards laid down in Delegated Regulation (EU) 2022/1288 as regards the content and presentation of information in relation to disclosures in pre-contractual documents and periodic reports for financial products that invest in environmentally sustainable economic activities (CDR (EU) 2023/363) with the aim of correcting and amending CDR (EU) 2022/1288.
Supervisory convergence
On 12 January 2024, the EBA, EIOPA, and ESMA (Joint Committee of the European Supervisory Authorities) published "Consolidated questions and answers (Q&A) on the SFDR (Regulation (EU) 2019/2088) and the SFDR Delegated Regulation (Commission Delegated Regulation (EU) 2022/1288)".
This document combines responses given by the European Commission to questions requiring interpretation of EU Law, and responses generated by the European Supervisory Authorities relating to the practical application or implementation of SFDR.
Read Consolidated questions and answers (Q&A) on the SFDR (Regulation (EU) 2019/2088) and the SFDR Delegated Regulation (Commission Delegated Regulation (EU) 2022/1288) here.
On 30 October 2024, the European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published their third annual Report on disclosures of principal adverse impacts under the Sustainable Finance Disclosure Regulation (SFDR).
The Report assesses both entity and product-level Principal Adverse Impact (PAI) disclosures under the SFDR. These disclosures aim at showing the negative impact of financial institutions’ investments on the environment and people and the actions taken by asset managers, insurers, investment firms, banks and pension funds to mitigate them.
The findings show that financial institutions have improved the accessibility of their PAI disclosures. There has also been positive progress regarding the quality of the information disclosed by financial products, and, in general, in the quality of the PAI statements. A few National Competent Authorities (NCAs) also reported slight improvements in the compliance with the SFDR disclosures in their national markets.
Looking forward, the Report includes recommendations to NCAs to ensure convergent supervision of financial market participants’ practices, and to the European Commission for their comprehensive assessment on the SFDR.
The ESAs have also developed an overview of good practices related to the location, clarity, complexity of the disclosures based on a survey of NCAs.
