SFRD: New mandatory disclosures on social and climate targets for financial products
The three main European financial supervisory authorities (EBA, EIOPA & ESMA), have announced the publication of their final report on amendments to the draft regulatory technical standards (RTS) announced. In doing so, they are also announcing the disclosure obligations that will now be imposed by the Sustainable Finance Disclosure Regulation (SFRD).
What is the SFRD?
The EU SFDR is part of the EU Action Plan on Financing Sustainable Growth. The aim of the regulation is to harmonize transparency requirements with regard to sustainability aspects in the investment decision-making, investment advice and insurance advice process for financial market participants and financial advisors. There is currently a risk of distortion of competition and incorrect investment decisions due to different national and sectoral approaches. The SFDR was already adopted in 2019 and its publication requirements will be gradually introduced in the years 2021 to 2023. Proposals on the technical regulatory standards for social objectives are particularly new.
The RTS aim to improve the disclosure of sustainability information for financial products. They contain a reporting template with a predefined format that is to be used to explain the consideration of material adverse sustainability impacts (so-called Principal Adverse Impacts, PAIs for short) of investment decisions on sustainability factors. The PAIs are exclusively indicators or key figures that have a negative ESG impact and should therefore be reduced (a positive expression of the PAIs is considered negative for sustainability, see taxonomy criterion "no significant adverse impact on any of the other EU environmental objectives")
Changes
Key changes proposed as part of the revision of the ESAs include the expansion and adaptation of the list of PAIs that demonstrate the negative impact of investment decisions on sustainability factors to include a number of social indicators. Mandatory PAI indicators now include "engagement with companies involved in tobacco growing and production" (updating a previous tobacco-related indicator), "employees paid less than a fair wage", as well as revised indicators for investments in companies involved in breaches of the OECD Guidelines for Multinational Enterprises and for the gender pay gap between female and male employees. In addition, the regulators require that financial products that aim to reduce greenhouse gases (e.g. investments in low-carbon technologies) include detailed disclosure with an explanation of the objectives as well as the provision of more detailed information on the website.
Other revisions to the SFDR regulation proposed by regulators include improvements to disclosures on how sustainable investments "do no significant harm" to the environment and society, simplification of the templates for pre-contractual and periodic disclosures, and other technical adjustments.
Following the publication of the ESAs' report, the European Commission will have three months to decide whether to approve the draft RTS. The possible application of the new RTS would be independent of an ongoing review of the SFDR by the Commission, which has been announced for September 2023.
Challenges and opportunities for the banking sector
The major challenge in managing the SFRD is the availability of the data required for the sustainability audit, which is often not available within the Group, particularly due to the novelty of the social aspects. Today, this data usually has to be purchased from specialized data providers and integrated into the company's own data repository. Comprehensive data management is required here, which must continuously collect and interpret data from its own customers. In addition, the concept of which investments "do not cause significant damage" is formulated in a very abstract way, which means that there are difficulties in defining such financial products.
However, the SFRD also offers opportunities: by identifying companies with high ESG risks, banks can improve their risk management by taking a company's ESG risk into account when making lending or investment decisions. In addition, the SFRD offers banks the opportunity to offer a wide range of sustainable products to meet customer demand.
We support you with all requirements relating to the SFRD Regulation. Do you have questions about the integration of sustainability-related data or the identification of ESG risks? Please contact us personally at https://curentis.com/consulting/regulatory-reporting/
