The European supervisory authorities, EBA, EIOPA and ESMA, have now presented the final report including draft regulatory technical standards (RTS) to the European Commission. The RTS draft includes proposals on the content, methodology and presentation of disclosures under SFDR.

ESMA, EBA and EIOPA coordinated the input from the consultation papers published in April 2020 and developed a recommendation to the Commission. “[…]The ESAs have taken into account stakeholder feedback on the consultation and have adapted the proposed disclosures,” said Steven Maijoor, chair of the ESAs’ joint committee

The ESG regulations are a response, among other things, to increased investor demand for sustainable financial products. They are also intended to increase transparency around sustainable investment strategies and limit greenwashing. The ESAs want to increase the investor protection with the RTS draft. Through the RTS, they intend to improve environmental, social and governance disclosure by making the negative impacts of investment decisions and the sustainability attributes of financial products clearly visible to financial market participants.

Under the EU Regulation on Sustainability Related Disclosures in the Financial Services Sector (SFDR), they make the following recommendations:

  • Company-level disclosure
    • Negative impacts of investment decisions related to climate and environment, social and labor concerns, respect for human rights, and anti-corruption and anti-bribery aspects should be disclosed in the form of a statement on the company’s website
    • A list of negative key impacts has been developed by the ESA based on the SFDR
    • Principle of proportionality: a “comply-or-explain” basis applies to companies with less than 500 employees
  • Product level disclosure
    • An annex should show the sustainable characteristics and objectives of a financial product
    • Pre-contractual information shall present how the product meets the ESG criteria and sustainable investment objectives
    • The company’s website should have information about the methods used to evaluate the ESG criteria in connection with the product
    • Periodic reports on how the products meet ESG criteria, and for products that have sustainable investment objectives and/or whose objective is to reduce carbon emissions
    • Information regarding how the investments follow the sustainable investment objectives in accordance with the “do not materially harm” principle

The ESAs do not have the authority to distinguish disclosures by financial market participants and products, so disclosures from the RTS are necessary for a very wide range of products and complement existing sectoral disclosure documents in form of annexes.

As of March 10, 2021, financial market participants must comply with the disclosure under the SFDR. However, the application of the RTS will take place at a later date. While the European Commission is expected to approve the RTS within 3 months of its publication, the ESAs recommend that the RTS be applied as of January 1, 2022.

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