Heads Up: Proposed Amendments To The SFDR Detail New Climate Disclosure Requirements

Heads Up: Proposed Amendments To The SFDR Detail New Climate Disclosure Requirements

The Sustainable Finance Disclosure Regulation (SFDR) is a new ESG regulation in Europe that requires financial market participants (FMPs) to disclose how sustainability risks are integrated into their investment decisions. On 12 April 2023, the European Supervisory Authorities (ESMA, EBA and EIOPA) proposed amendments to the European Commission's Regulatory Technical Standards implementing SFDR.

FMPs have taken some time to get comfortable with the interpretation and application of the SFDR, which has become a labelling framework for different funds. The proposed amendments seek to clarify and expand on some of the existing requirements and introduce new ones, with a particular focus on social aspects.

One of the key proposals is to expand the list of mandatory "social" indicators included in Principal Adverse Impacts (PAI) disclosures. PAIs require FMPs to report on the impact of their investments on environmental objectives. The proposed amendments seek to add new indicators, such as labour and human rights practices, to the PAI and to apply these social PAI indicators to real estate assets.

Another proposal is to expand the PAI definition of "inefficient real estate assets built before 31 December 2020". The current definition applies to buildings that do not meet minimum energy efficiency requirements, but the proposed amendments seek to broaden the definition to include buildings that do not meet other sustainability criteria, such as water efficiency or indoor air quality.

The amendments also include changes to the SFDR’s Article 8 and 9 Disclosure Templates. Article 8 applies to financial products that promote environmental or social characteristics, while Article 9 refers to financial products that have sustainable investment as their objective. The proposed amendments seek to clarify the disclosures required under these articles and to introduce more granular disclosures around compliance with the "Do No Significant Harm" principle.

The proposed amendments will take reporting on greenhouse gas emissions reduction targets even further, noting that they should be detailed in financial products and offer clear disclosures about the way in which a target will be achieved.

At Verdantix, we have been tracking developments in the SFDR space closely. We recently published Market Insight: New SFDR Requirements And The Supplier Landscape, which provides an in-depth analysis of the SFDR requirements, their implications for financial institutions, and the offerings available to support financial services firms disclosing for the SFDR both at the product and the entity level.

Ultimately, the proposed amendments seek to provide more clarity and specificity around SFDR requirements and to expand the disclosure obligations to cover social aspects. Firms that must report under the SFDR will need to review the proposed amendments carefully and ensure that they are prepared to comply with the new requirements.