EU: ESAs 2024 report show significant improvements of firms’ disclosure of principle adverse impacts under SFDR

The European Supervisory Authorities (ESAs) have published their third annual report on disclosures of Principal Adverse Impact (PAI) under Article 18 of the Sustainable Finance Disclosure Regulation (SFDR). 

Building on the two previous reports that the ESAs have published since the entry into force of the SFDR, the 2024 report provides an overview of good practices related to the location, clarity and complexity of the disclosures. The report also includes recommendations to the European Commission and to national competent authorities (NCAs), thereby providing an indication of what regulators will expect firms to deliver going forward and that further guidance, such as via CEO letters, is likely to come.

Approach

Consistent with previous years, the 2024 report covered the assessment of the disclosures by financial market participants (FMPs) choosing to explain why they do not consider adverse impacts of investment decisions on sustainability factors, as well as disclosures of PAI consideration for financial products. However, the scope of the 2024 report has been broadened to also cover disclosures made under the SFDR Delegated Regulation template.

Main findings

The findings from this year's survey showed significant improvement in the quality of the responses provided by the NCAs, both on the quantitative and qualitative side, with a greater sample size and higher representation in terms of number of FMPs covered, reflecting an improving state of PAI disclosures generally.

The ESAs found overall positive progress on several elements compared to previous years, in particular on the location of the disclosures, which are becoming more and more accessible to retail investors, and on the level and quality of the information disclosed. Significant improvements were identified in product PAI disclosures, although the share of products disclosing SFDR PAI information remains quite low. 

The ESAs also note that while significant improvements have been made with the level of compliance with the SFDR provisions, additional efforts are still needed to achieve full compliance.

Examples of good practice

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

• FMPs that provide direct links on their website with clear sections such as 'Sustainability-related disclosures' or 'SFDR'.
   
• FMPs that present the information segmented and labelled in accordance with the SFDR requirements, ensuring key points are immediately apparent and easy to comprehend.
   
• FMPs publishing the Article 4 disclosure including all the PAI indicators according to Table 1 of Annex I of the SFDR Delegated Regulation.
   
• FMPs offering extensive explanations in their PAI statements.
   
• Clear description of specific actions already taken or upcoming plans for actions or initiatives.

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:

• As stated in its joint opinion on the assessment of the SFDR, the ESAs reiterate the need to reduce the frequency of their assessment of the PAI disclosures under the SFDR to every two or three years, which allow the ESAs and NCAs to focus more resources on delivering a more meaningful analysis of the PAI disclosures.
   
• The ESAs also reiterate that the Commission could consider other ways of introducing proportionality for FMPs, as the “more than the 500-employees" threshold may not be a meaningful way to measure the extent to which investments may have principal adverse impacts on sustainability factors. An alternative, and 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.

Recommendations for the NCAs

Building on the previous Reports, the ESAs share the following recommendations:

• Development of Sup Tech tools: the use of Sup Tech tools could support the NCAs in future market surveys; 
   
• Communication about supervisory expectations with FMPs: the ESAs invite the NCAs to continue communicating their expectations ahead of the key deadlines (e.g. 30 June); 
   
• External communication: regular communications in the form of 'Dear CEO letters', supervisory guidance documents and engagement with market participants through regular surveys and workshops with the industry; 
   
• Internal communication: reiterate the importance of sustainable finance also internally, making a conscious effort to increase resources and knowledge on the topic; 
   
• Day-to-day supervision: continue placing the assessment of PAI disclosures – whenever possible under a risk-based approach – as part of the NCAs' supervisory approaches; and
   
• Investment composition checks: the ESAs invite NCAs, where the PAI disclosures may show discrepancies with underlying investments, to increasingly challenge FMPs and financial product's PAI disclosures based on actual investments and underlying companies' adverse impact disclosures.

The report is available here.

The press release is available here.