EU: ESAs report on the current state of voluntary disclosures of PAI under the SFDR

The European Supervisory Authorities (ESAs) have published their first annual report to the European Commission on the extent of voluntary disclosure of principal adverse impact (PAI) under Article 18 of the Sustainable Finance Disclosure Regulation (SFDR). The report provides an overview of good examples of best practice on disclosures and areas for improvement, as well as including a set of recommendations for national competent authorities (NCAs) to ensure appropriate supervision of financial market participants' (FMPs) practices.

Background

Article 4(1)(a) of the SFDR mandates disclosure on the website of FMPs, on a comply or explain basis (save for FMPs with more than 500 employees), of the PAI that investment decisions have on sustainability factors. Article 4(1)(b) requires that, where an FMP does not consider adverse impacts of investment decisions on sustainability factors, it must publish and maintain on its website clear reasons for why it does not do so, and where relevant, information as to whether and when it intends to do so.

To determine the extent of voluntary disclosures, in March-April 2022, the ESAs conducted a survey of the NCAs asking for feedback about the current state of voluntary disclosures published by FMPs below the 500-emloyee threshold and to highlight any best practice on PAI reporting.

Summary of key findings

• The extent of compliance with voluntary disclosures varies significantly across respondents but, overall, the first disclosures since the application of the SFDR are not very detailed. This is expected to change for the disclosures made for the 2022 reporting period once the SFDR Delegated Regulation applies.
  
  
• NCAs have reported overall low level of disclosure of the degree of alignment with the objective of the Paris Agreement, with disclosures on the alignment being vague and high level.
  
  
• There is a low level of compliance with the details required for explaining why FMPs do not take into account the adverse impact of their investment decisions.

Good examples of best practices

The ESAs highlight examples of best and bad practices on disclosures under Article 4(1)(a) and (b) SFDR as shared by the NCAs. Best practices include:

• making disclosures prominent on websites (as opposed to footnotes or hidden links).
  
  
• improving the overall visibility of the disclosures.
  
  
• including the date in disclosure documents allowing them to be quickly found through a web search, and having a title with the language and wording closely aligned with SFDR.

In terms of the content of disclosures, the ESAs provide examples of best practices, bad practices and examples where there is margin for improvement. Perhaps predictably, more detailed and precise disclosures are generally considered to be the best practices, whereas the examples of bad practices generally relate to vague and unsupported statements by FMPs. Interestingly, the ESAs note that statements that FMPs do not consider PAIs whilst they remain to be finalised in the relevant Level 2 are “a helpful example of FMPs not considering PAIs albeit it could include further information”. They also note that statements that an FMP does not consider PAIs because data is not yet sufficiently available is “strictly speaking compliant with the rules”.

The ESAs highlight that these examples must be considered preliminary at this stage and that they will be complemented further in subsequent reports. In addition, the ESAs consider it to be too early to offer meaningful guidance on the implications for due diligence disclosures more generally but plan to address this in future reports, which will also cover voluntary disclosures under Article 7(1) which becomes applicable from 30 December 2022.

Recommendations for NCAs

The ESAs have not made any recommendations with regards to the SFDR requirements to the Commission at this stage, as practices of FMPs are expected to become more easily comparable with the application of the Level 2. However, the ESAs have made recommendations for NCAs to ensure an appropriate supervision of FMPs’ practices. These include:

• continuous market observation to identify FMPs that are not compliant with the voluntary disclosures and ensure compliance with Article 4(1)(a) and (b) SFDR;
  
  
• greater sample size and more details in reporting figures;
  
  
• running regular surveys in their own market to determine whether supervised entities comply with the Article 4 SFDR disclosures;
  
  
• offsite inspections during the course of the year to identify regulatory breaches;
  
  
• use of IT tools to allow easier assessment; and
  
  
• additional instructions to supervised entities regard technical aspects of website disclosures

The joint report is available here.

The press release is available here.