Sustainable finance and sustainability reporting

The Regulatory Technical Standards responds to the mandate sent by the European Commission in April 20221 to revise several aspects of the functioning of the Commission's Delegated Regulation (EU) 2022/1288 (SFDR), including the disclosure of the main adverse impacts (PAIs) of investment decisions on sustainability factors and to introduce disclosure of decarbonisation targets for financial products. Currently, mandatory Potential Environmental Impacts (PAIs) indicators include exposure to companies active in tobacco cultivation and production, employees earning less than adequate wages, and investments in companies involved in violations of the OECD Guidelines on Multinational Enterprises and the Gender Pay Gap

The three European supervisory authorities (EBA, EIOPA and ESMA - ESA) have published the Regulatory Technical Standards, thus completing the Sustainable Finance Disclosure Regulation (Sustainable Finance Disclosure Regulation). The report was published in response to the European Commission's request to the ESAs in April 2022. Initially, the publication was scheduled for six months later, but was postponed following a request by the authorities to November 2022. Among the proposals made by the authorities are the addition of new social indicators and the simplification of the framework for disclosing the 'adverse impacts' of investment decisions on the environment and society (ESG).

European authorities have also suggested a new disclosure on financial products linked to greenhouse gas emission reduction targets and carbon footprint. This disclosure should apply to products that have emission reduction as an investment objective. Requirements for this category of products would include disclosure of the outcome that the product commits to in the pre-contractual documents and alignment with the ultimate goal of limiting global warming to 1.5 degrees Celsius, as well as disclosure of periodic reports to illustrate progress in the investment strategy and provide more detailed information on the website.

In the immediate context of this final report, the ESAs note that the consultation envisages slightly more specific disclosure on how financial products 'take into account' PAI indicators for the purposes of the DNSH principle for sustainable investments. The draft RTS will include a requirement to disclose the thresholds or criteria for PAI indicators that the financial product uses to determine that its sustainable investments comply with the DNSH principle.

The Regulatory Technical Standards report highlights (at question 21) that in order to reduce the risk of greenwashing and increase comparability, in the context of DNSH, disclosure of the quantitative thresholds used is a necessary but not sufficient condition. The relevance of PAI indicators for DNSH purposes may vary between financial products. There should be transparency on the selection and prioritisation of PAI indicators. Hence the relevance of Article 7 of the Commission Delegated Regulation No. 2022/1288 on the "Description of policies to identify and prioritise key negative impacts on investment decisions based on sustainability factors".

The authorities also proposed further technical amendments to the SFDR, including improved disclosure on how sustainable investments do not cause significant harm to the environment and society, simplification of pre-contractual and periodic disclosure templates for financial products, and technical adjustments concerning, for example, the treatment of derivatives, the calculation of sustainable investments, and provisions for financial products with underlying investment options.

With regard to the simplification of financial product disclosure templates, the supervisory authorities, based on stakeholder feedback and supervisory work, have made improvements. In particular, language has been simplified, information provided has been restructured to avoid repetition, and a dedicated 'dashboard' has been introduced that provides key information on the first page of documents, along with more detailed information on subsequent pages. The dashboard highlights whether a financial product has a sustainable investment objective or promotes environmental/social characteristics. By promoting a company that takes stakeholders and all interested parties into account, significant advantages can be achieved in the market, such as greater acceptance, stability and security for the future. 3Bee supports companies on the path to biodiversity through innovative regeneration projects.

Regulators have made further proposals to revise the SFDR, aimed at improving disclosure regarding sustainable investments in order to avoid significant harm to the environment and society (Do Not Significant Harm - DNSH). In addition, the aim is to simplify the models for pre-contractual and periodic disclosure of financial products, as well as to make technical adjustments regarding the treatment of derivatives, the calculation of sustainable investments, and the provisions for financial products with underlying investment options. The European Commission will have three months to examine the RTS draft and decide whether to approve it. The potential application of the new RTS would be independent of a review of the SFDR by the European Commission, which was announced in September 2023 and is currently ongoing.

Article by Angelina Tortora