16 June 2022

Recently issued SFDR/TR guidance

1) Summary: ESA statement of clarifications (2 June)


The ESAs’ latest 12-page statement is part of their “on-going efforts to promote a better understanding” of the disclosures required under their SFDR /TR RTS. It follows “numerous requests for clarifications” across the industry, notably those linked to principal adverse impact (PAI) and “do not significantly harm” (DNSH) disclosures.

Their paper does not refer to the current legal texts adopted by the EC on 6 April 2022; it refers instead only to their original draft RTS issued in February 2021 and a revised TR-aligned version published in October 2021.

Subject areas covered are:

a)  Disclosure of principal adverse impact (PAI) of investment decisions on sustainability factors

This section (p.2-7) contains guidance in relation to:

  • Use of “Sustainability indicators: the ESAs highlight the difference between “sustainability indicators” (required for disclosure in the product-level website and periodic reporting), compared with indicators for principal adverse impact” (required for disclosure in the entity-level statement). However, “it is possible” to use the PAI indicators “to measure the environmental or social characteristics or the overall sustainable impact of the financial product”. They use a table to illustrate three examples of PAI “possible” uses at product level.
  • PAI calculation method: previously questioned by several financial market participants (FMPs), the ESAs latest explanations include a worked example.
  • Look-through approach and investment instrument scope: the ESAs consider that “all investments, both direct and indirect” including funds of funds, “should be included” in calculations included in the reporting of entity-level PAI of investment decisions
  • Direct and indirect investments in pre-contractual and periodic disclosures: the ESAs state that pre-contractual and periodic disclosures of SFDR products (art.8, art.9) “could outline what share of the investments of the financial product is held directly and what share is held indirectly”
  • Further guidance on the adverse impact indicators (entity-level): the ESAs provide further guidance on their entity-level PAI statement template, including various mandatory and optional PAI indicators within the current RTS (c/o Annex I, tables 1-3)

b) Pre-contractual financial product disclosures

This includes how products investing in an evolving mixture of environmental and social objectives can meet the requirement to calculate the minimum proportion of taxonomy-aligned investments

c) Periodic financial product disclosures

The ESAs clarify the top holdings of the financial product section, while confirming that all periodic statements issued after 1 January 2023 must comply with the SFDR / TR RTS disclosure rules.

d) Taxonomy-related financial product disclosures

The ESAs state that the pre-contractual taxonomy-alignment of the product can be calculated using either turnover, capital expenditure or operating expenditure measurement. As before, all three KPIs must be disclosed in the periodic statement.

e) Guidance related to “do not significantly harm” (DNSH) disclosures

The ESAs acknowledge “significant attention paid” to the proposed DNSH disclosure, which shares the same adverse impact indicators specified for the entity-level PAI statement [Annex I]. However, they clarify there “is no direct link” between the PAI and DNSH disclosures, which “apply independently”.

f) Disclosures for financial products with investment options

Finally, the ESAs clarify pre-contractual and periodic disclosure rules for multi-option products and other financial products with underlying investment options.

Ongoing, the ESAs state they will issue further “practical application Q&As” to “promote a better understanding” of their SFDR/TR framework, after their RTS is approved and published in the EU Official Journal.



2)  Summary: ESMA SFDR supervisory briefing (31/05)


ESMA’s recent 16-page SFDR briefing document was published on the same day as their Irish Funds conference appearance. It was issued to national competent authorities (NCAs), as part of their Sustainable Finance Roadmap efforts to “ensure convergence” in the supervision of “sustainable” products and “combat greenwashing”.

Key content in this “non-binding” document includes:

a) Supervision of fund documentation and marketing material

This section (p.5-13) contains NCA guidance in relation to:

  • Compliance of the pre-contractual disclosures
  • Consistency of information in the fund documentation and marketing material
    • Presentation of disclosures
    •  Principles-based guidance on fund names
    • Sustainable investment policy and objectives
    • Investment strategy
  • Compliance with the website disclosure obligations
  • Compliance with the periodic disclosure obligations
  • Additional NCA supervisory actions including ad-hoc thematic review and portfolio analysis

NB: Notable ESMA expectations relate to:

  • Principal adverse impact: NCAs should verify “relevant” PAI indicators from the entity-level PAI statement “have been considered for the purpose of the PAI disclosures” at product-level pre-contractual disclosure.
  • Fund documentation’: ESMA state that NCAs should “be satisfied that sustainability-related disclosures made are consistent across the fund documentation and the marketing material.” Their description of ‘fund documentation’ contains “the KIID and/or the KID as well as the fund rules / articles of association”; these are not specified in either SFDR level 1 or level 2 RTS, which both refer only to the prospectus or offering documents as the central means of SFDR product pre- contractual disclosure (to be attached as an annex).


b) Integration of sustainability risks by AIFMs and UCITS managers

ESMA clarify the SFDR sustainability risk and factors set to apply for both regimes, from 1 August 2022. These require “a broad scope” as “even fund managers that do not offer sustainable funds will be required to comply with the new rules”. They provide a checklist of relevant policy and procedures, to assist the NCAs assessment of “adequate” SFDR implementation across firms in the EEA.

NB: ESMA does not clarify if non-EU AIFMs (marketing their AIFs in the EEA [per AIFMD art.42]) fall within scope of SFDR as FMPs. This would include fund managers based in the UK, post-Brexit.


c) Regulatory interventions in case of breaches

Within ESMA’s summary of supervisory and investigative powers now available, they encourage “proportionate” supervision to be applied by the NCAs at this stage.

ESMA’s press release said this supervisory briefing may be updated “if needed, considering experiences after the SFDR RTS starts applying on 1 January 2023”.

In the meantime, ESMA are currently scheduled to issue SFDR consultation papers in relation to PAI indicators (Q2/Q3 and Q4-2022) and MiFID II product governance sustainability requirements (Q3-2022).




3)  Summary: EC SFDR legal clarifications (25/05)


The European Commission’s recent 11-page SFDR legal Q&A contains their responses to specific “interpretation of Union law” queries formally raised by the ESAs on 11 May 2022. These include:

The EC confirm that firms below the 500-employee threshold that choose not to consider entity-level PAI of their investment decisions can manufacture a financial product that “pursues a reduction of negative externalities” caused by underlying investments (i.e., if they disclose accordingly).

NB: MiFID II firms are likely to appreciate this EC clarification, ahead of SFDR client sustainability preference rules applicable from 2 August 2022. UCITS / AIF firms managing different types of funds (per SFDR articles 6,8,9) will also welcome the ability to select their required product-level PAI compliance, ahead of SFDR sustainability risks and factors that will apply from 1 August 2022.


In their most detailed feedback (p.9-11): the EC state the purpose of the EU-Taxonomy product transparency rules is to “incentivise behavioural change in the whole value chain, including delivery of sound information on sustainability performance on underlying investments”. The EC also clarify:

  • Transparency of products promoting environmental characteristics (TR art.6): disclosure rules apply directly to all SFDR 8 products regardless of whether they invest in sustainable economic activities (this is deemed to be “irrelevant” by the EC).
  • Transparency of environmentally sustainable investments (TR art.5): this applies also to SFDR 9 products with a social objective, where they invest in activities that contribute to an environmental objective.
  • Data use: Unless firms use “reliable data” in their disclosure of art.5 / art. 6 TR product information, they will risk legal infringement, incurring liability and contractual voidance under EU and national law.
  • ‘Zero indication’: where firms fail to collect data on the relevant TR environmental objectives (incl. substantive contributions and do no significant harm criteria), they must ‘indicate zero’.
  • Narrative explanations: the EC state these “risk contradicting the purpose” of the TR itself; where used by a firm, clarifications must not “leave room for ambiguity” in terms of the product sustainable investment alignment; the EC prohibit “negative justifications”, including those “explaining a lack of the alignment by a lack of data”.


c) Good governance

The EC warn that Article 8 products will be in breach of the SFDR regime unless companies invested within their portfolio follow good governance practices. Similarly, Article 9 products will be in breach of SFDR unless all underlying assets are qualified as ‘sustainable investments and the investee company directly applies “sound management structures, employee relations, remuneration of staff and tax compliance”.


The EC confirm that firms currently drawing up annual reporting for any financial product must comply with the SFDR periodic reporting and website disclosure obligations; this includes any product withdrawn from new end investors since 10 March 2021 (i.e. start date of the level 1 SFDR regime).

NB: the EC letter accompanying their latest Q&A contains a legal disclaimer.

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