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EU: ESAs publish second report on the extent of voluntary disclosure of principle adverse impacts under SFDR

Following on from their first annual report to the European Commission in July 2022 (see our blog post here), the European Supervisory Authorities (ESAs) recently published their second annual joint report on the extent of voluntary disclosure of principal adverse impact (PAI) under 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.


For the 2023 Report, the ESAs have taken a similar approach to the one adopted for the 2022 Report and launched a survey of the NCAs, seeking feedback on the current state of entity-level voluntary PAI disclosures under SFDR. It also included a question to gather NCAs’ feedback on the disclosures by FMPs choosing to explain why they do not consider adverse impacts of investment decisions on sustainability factors. The survey also covered disclosures of PAI consideration for financial products for the first time since FMPs had to apply them by 30 December 2022

Key Findings: 

The results show an overall improvement in the application of voluntary disclosures compared to the previous year, and disclosures appear easier to find on websites compared to the previous year. However, there is still significant variation in the extent of compliance with the requirements and in the quality of the disclosures both across FMPs and across jurisdictions. 

The ESAs consider that an area that requires improvement is regarding the explanation of non-consideration of PAIs, where explanations are still not fully complete and satisfactory. Where PAIs are considered, the disclosures on the degree of alignment with the Paris Agreement are still only vaguely formulated, and FMPs mention their degree of alignment to Paris Agreement without mentioning indicators measuring the decarbonisation path of their investments (or course noting that those disclosures are not mandatory as the degree of alignment with the objectives of the Paris Agreement should be disclosed “where relevant”). On the non-consideration of PAIs, the ESAs identify that FMPs in different jurisdictions have declared that they do not comply because they are under the 500 employees’ threshold or because of the current limitations on readily available data to fully comply with the reporting requirements. The ESAs do not consider those to be a sufficient justification for explaining why the FMP does not consider the adverse impacts of its investment decisions and recommend supervisory follow up to ensure appropriate understanding of the relevant provisions. At a minimum, the ESAs have stated that they consider it best practice that FMPs should at least indicate a target date for when they intend to start to consider PAI indicators.  This statement could be understood as indicating that the “opting out” should be only temporary. This is interesting considering the one of the questions in the recent SFDR review consultation (see our blog post here) is whether entity level PAI reporting should be removed.

In 2024, the third iteration of the Report will likely include an additional assessment of product level voluntary disclosures under Article 7(1) SFDR and additional questions regarding processes and methods in comparing disclosures from previous years.

Recommendations for the European Commission

The report includes a set of recommendations for the European Commission to consider ahead of the next comprehensive assessment of the SFDR. These are as follows:

  • Other ways of introducing proportionality for FMPs, as the more than the 500-employee’s threshold may not be a meaningful way to measure the extent to which investments may have principal adverse impacts on sustainability factors. The ESAs are of the view that a more suitable approach to disclose on the adverse impact of FMPs could consist, for example, of establishing a threshold based on the size of the FMP’s investments.  This is surprising considering the push for removal of entity level PAI reporting.
  • Whether the product level disclosures under Article 7 SFDR should also follow a comply or explain basis, regardless of whether the FMP applies Article 4(1)(a) SFDR, to ensure consistency with the entity level disclosures which cover all investments of the FMP and with Q&A IV.2 in the consolidated Q&A document which allows PAI consideration for the financial product even when the FMP does not apply Article 4(1)(a)14. Hence, when an FMP discloses at entity level that it considers adverse impacts of the investment decisions on sustainability factors under Article 4(1)(a) SFDR, investors might expect that this entails that the product sold by the FMP also considers adverse impact of investment decisions on sustainability factors under Article 7 SFDR. The current practice observed by supervisors is that while at entity level FMPs declare that they consider PAIs, this is not always reflected in the product disclosures. This would have a major impact on the industry considering it generally does not consider product level PAI for Article 6 products. This would require the FMPs to report on consideration of PAI for each of their funds whether Art 6, 8 or 9
  • Reducing the frequency of the Article 18 SFDR Report in the upcoming review of the Level 1, to every two or three years. This would allow more meaningful analysis about longer term trends.

Recommendations for NCAs

The report also includes recommendations to NCAs. These include:

  • Following up with non-compliant market participants and considering whether the use of enforcement tools could be appropriate. Similar to last year’s recommendation, NCAs should identify breaches from FMPs and follow up appropriately.
  • Providing support to market participants and highlighting common supervisory expectations, potentially coordinated by the ESAs, to facilitate understanding about how to comply with Article 4(1)(a) SFDR disclosures.
  • Using tools, potentially coordinated by the ESAs, which could assist NCAs in the identification of the information on the voluntary disclosures on PAI considerations of products disclosing under Article 8 and Article 9 SFDR.
  • Facilitating exchange with the industry to raise awareness and exchange best practices.
  • Sharing survey results with the industry, including the supervisory expectations used by NCAs to assess the market participants’ level of compliance with the disclosure requirements.
  • Finally, the ESAs noted the use of incorrect references to specific disclosure obligations in the responses provided by NCA which show that there is still an improvement and build-up of expertise needed by the NCAs to enable thorough checking of the compliance. The ESA provided some examples and clarified those concepts (for example the confusion between “consider” and “take into account”.  The ESAs also noted the widespread use by NCAs of terms not related to the consideration of adverse impacts, such as ‘ESG criteria’, ‘ESG risks’ and ‘sustainable investments goals’. The correct terminology should rather focus on ‘sustainability impacts’, ‘sustainability indicators’, the ‘engagement policies to address the adverse impacts of the investment decisions’, and the ‘degree of alignment with the objectives of the Paris Agreement’ which represent a good measure on the adverse impact on the climate).

You can find the ESAs joint report here.

The press release is here.


sfdr, sustainable finance, eu-wide, blog posts