Europe’s three primary financial regulatory agencies, the European Supervisory Authorities (ESAs), announced the publication of their Final Report amending the draft Regulatory Technical Standards (RTS), completing their review of key disclosure rules for financial products under the Sustainable Finance Disclosure Regulation (SFDR), with proposals for new mandatory reporting on social factors such as exposure to tobacco production and inadequate wages, as well as new financial product disclosure of greenhouse gas (GHG) emission reduction targets.

The EU SFDR forms part of the EU’s Action Plan on financing sustainable growth. The regulation aims to establish harmonized rules for financial market participants including investors and advisers on transparency regarding 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.

The publication follows a request by the European Commission in April 2022 for the ESAs to review the Regulatory Technical Standards (RTS) set out in the SFDR regulation, including its indicators for principal adverse impact (PAI) and financial product disclosures. Originally set with a 12-month deadline, the ESAs informed the Commission of a 6-month delay in its review in November 2022.

Among the key changes proposed in the ESAs’ review is an extension and adjustment of the list of PAIs, detailing the adverse impacts of investment decisions on sustainability factors, to include a series of social indicators. Mandatory PAI indicators now include “exposure to companies active in the cultivation and production of tobacco” (updating a prior tobacco-related indicator), “employees earning less than an adequate wage,” and modified indicators for investments in companies that have been involved in violations of the OECD Guidelines for Multinational Enterprises, and for the gender pay gap between female and male workers.

The regulators also developed draft RTS incorporating new disclosures for financial products regarding GHG emissions reduction targets, applying to products that have emissions reductions as their investment objective. Requirements for these products would include disclosure in pre-contractual documents on the type of outcome the product is committing to achieve and on the alignment of the target with the goal of limiting global warming to 1.5 degrees C, periodic report disclosure to provide progress and explanation on how the investment strategy contributed to the progress, and to have more detailed disclosures available on the website.

Additional proposed revisions to the SFDR regulation brought forward by the regulators include improvements to disclosures on how sustainable investments “Do No Significant Harm” (DNSH) to the environment and society, simplification of templates for pre-contractual and periodic disclosures, among other technical adjustments.

Following the publication of the ESAs’ report, the European Commission will have three months to decide whether to endorse the draft RTS. The potential application of the new RTS would be independent of an ongoing review by the Commission of the SFDR, announced in September 2023.

Click here to access the ESAs’ report.