Sustainable Finance Disclosures Regulation (SFDR)

Executive Summary

The SFDR came into force in March 2021 as part of the European Commission’s Action Plan on Financing Sustainable Growth which was adopted in March 2018. The SFDR sets out how investors are informed of the sustainability risks of their investments, how the impact of those investments on the environment and society should be disclosed to investors and how products which are marketed as sustainable may provide acceptable evidence of their sustainability.

Although the SFDR only came into force in 2021, the European Commission has accepted that the regime is not working as intended. In October 2023, then Commissioner McGuinness explained that the Commission was “learning by doing” with the SFDR. Most notably, the Commission was concerned that the use of the disclosure regime as de facto product labels could lead to greenwashing risks. The Commission is likely to review the SFDR regime in Q3 2025. In the meantime, the European Supervisory Authorities (ESAs), under mandate from the European Commission, proposed changes to the SFDR’s Regulatory Technical Standards (RTS) in December 2023.

As mandated by the European Commission, these included changes to Principal Adverse Impacts (PAIs); changes to the PAI disclosure framework; and the introduction of decarbonisation disclosures. In steps taken beyond the European Commission’s mandate, the ESAs also proposed revisions to the template; changes to the treatment of products with investment options; and changes to the criteria for Do No Significant Harm (DNSH).

Adoption by the European Commission will be followed by a period of scrutiny by the European Parliament. The European Commission is then likely to apply a 12-month implementation period before the RTS comes into force.

Please contact Adam Jacobs-Dean or Thomas Sharpe with any questions regarding these proposals.

Adam Jacobs-Dean

Managing Director, Global Head of Markets, Governance and Innovation
Thomas Sharpe

Associate Director, Markets, Governance and Innovation

Practical Implications

When the RTS are finalised, this will require firms to consider additional social indicators for principal adverse impacts and change the calculation methodology for existing indicators.

New templates will also be in force, which means disclosures will need to be reviewed and new templates put in place.

Timeline

AIMA has categorized this proposal as Medium Priority/Medium Impact and it is therefore represented in mid-blue in the AIMA Regulatory Horizon Scan gantt chart.

Timeline and summary of changes pending finalisation

Authority	Rule Change	Effective date	Categorisation	Resources
ESAs	New or modified mandatory PAIs: Earnings in non-cooperative tax jurisdictions Exposure to companies active in tobacco cultivation and production Employees earning less than an adequate wage Companies involved in non-respect of OECD Guidelines and the UN Guiding Principles Gender pay gap (modification)	No earlier than Q4 2025 – awaiting final RTS, adoption and effective date	Medium Priority Medium impact	ESAs’ final report on SFDR RTS
ESAs	New optional social PAIs: Non-guaranteed hour employees Temporary contract employees Non-employee workers Insufficient employment of people with disabilities Lack of grievance for communities affected by investee company Lack of grievance for end-users of investee company Trade union and collective bargaining assessments	No earlier than Q4 2025 – awaiting final RTS, adoption and effective date	Medium Priority Medium impact	ESAs’ final report on SFDR RTS
ESAs	Treatment of derivatives and other PAI changes: Derivatives must be included when calculating indicators for PAIs Value chain information for PAI indicators should be included Proportion of information obtained directly from investee companies should be disclosed	No earlier than Q4 2025 – awaiting final RTS, adoption and effective date	Medium Priority Medium impact	ESAs’ final report on SFDR RTS
ESAs	Disclosures relating to Greenhouse gas emissions reduction targets for Article 8 or Article 9 products: New pre-contractual disclosure New periodic disclosure New website disclosure	No earlier than Q4 2025 – awaiting final RTS, adoption and effective date	Medium Priority Medium impact	ESAs’ final report on SFDR RTS
ESAs	Changes to DNSH: Disclosure on website of threshold or criteria for PAI indicators used to ensure compliance with the DNSH principle Investments in Taxonomy-aligned economic activities automatically considered as sustainable investments	No earlier than Q4 2025 – awaiting final RTS, adoption and effective date	Medium Priority Medium impact	ESAs’ final report on SFDR RTS
ESAs	Calculation of the proportion of sustainable investments (made by comparing market value of sustainable investments of the product against the market value of all its investments) based on either the economic activity or the sustainable investments	No earlier than Q4 2025 – awaiting final RTS, adoption and effective date	Medium Priority Medium impact	ESAs’ final report on SFDR RTS
ESAs	Changes to simplify templates used for Article 8 and Article 9 disclosures	No earlier than Q4 2025 – awaiting final RTS, adoption and effective date	Medium Priority Medium impact	ESAs’ final report on SFDR RTS
ESAs	Disclosures for financial products with investment options	No earlier than Q4 2025 – awaiting final RTS, adoption and effective date	Medium Priority Medium impact	ESAs’ final report on SFDR RTS

Changes under consideration

The ESAs published a Joint Opinion on the SFDR review in June 2024. They set out a number of recommendations, the most notable of which would introduce a product categorisation system and/or a sustainability grading system.

ESMA published its own opinion on the EU’s sustainable finance framework in July 2024. This builds on the ESAs’ Joint Opinion and provides complementary recommendations to improve its usability as also outlined below.

Timeline and summary of changes under consideration

ESAs

Introduce product categories and/or a framework that uses sustainability indicators to grade sustainability products
Review the definition of sustainable investments under SFDR
Expand products in scope of SFDR particularly for investment options offered in multi-option products
Simplify and digitalise documentation
Improve transparency of product-level PAIs
Evaluate the introduction of a framework to assess sustainability of green bonds

No earlier than 2027 – awaiting proposals

Medium Priority

High impact

ESAs’ Joint Opinion on SFDR

ESMA

Introducing a product categorisation regime and assessing usefulness of a sustainability grading system
EU Taxonomy to be sole reference point for assessment of sustainability performance including on definition of sustainable investments
Extending Taxonomy disclosures on the share of revenue and CapEx associated with harmful activities that are either transitioning or decommissioning because their environmental performance cannot be improved
Introducing minimum sustainability disclosures for all financial products - including an assessment on which MiFID II financial instruments not captured by SFDR should be also included
Regulate ESG data products (not just ESG ratings as per the ESG Rating Regulation)
Assess the need for the standardisation of disclosures under the Shareholder Rights Directive
Introduction of a voluntary Stewardship Code to support implementation of the EU sustainable finance framework across member states

No earlier than 2027 – awaiting proposals

Medium Priority

High impact

ESMA’s Opinion on SFDR

General AIMA Guidance

In collaboration with Maples, we have published two guides on SFDR which can be found here (August 2022) and here (May 2020). AIMA’s global resources related to responsible investment can be accessed here: https://www.aima.org/compass/practical-guides/responsible-investment-esg.html