SFDR: ESA’s final report on the draft level 2 regulatory technical standards and supervisory statement

The European Supervisory Authorities (the “ESAs”) have published their much anticipated final report on the draft level 2 regulatory technical standards (the “Draft RTS”) for the Sustainable Finance Disclosure Regulation (“SFDR”). The Draft RTS was released on 4 February 2021, less than six weeks before the high level and principles-based requirements contained in the SFDR start to apply on 10 March 2021. If approved by the European Commission (the “Commission”) it is expected that the Draft RTS will come into force on 1 January 2022.

The Draft RTS was prepared by the ESAs to provide further detail on and to assist in, the application of the SFDR provisions. While the draft RTS does make progress in clarifying certain issues, arguably, it has left more questions unanswered.

The Draft RTS takes into account feedback from key stakeholders on the draft report published by the ESAs in April 2020 (the “Draft Report”) and the subsequent consultation. This note aims to set out some of the key differences between the Draft Report and RTS.

Application of the Draft RTS

Although the Draft RTS will have full effect from 1 January 2022, if approved, it is well advertised that certain provisions of the level 1 SFDR will apply from 10 March 2021. Despite this, firms that are voluntarily complying with certain elements of the SFDR may want to do so after considering the wider obligations provided in the Draft RTS so that they understand the scope of their potential on-going disclosure commitment.

Further, the ESAs published a joint supervisory statement in which they unhelpfully suggest that the Draft RTS should be used as a reference point for the period between 10 March 2021 and the Draft RTS coming into force. Firms may choose not to attach much weight to the ESAs’ suggestion as the Draft RTS is subject to change following the Commission’s review. In any case, this is unlikely to affect the application of the relevant level 1 SFDR provisions from 10 March 2021.

Principle Adverse Sustainability Indicators (“PASI”)

Firms welcomed the ESAs’ reduction in the PASIs from 32 to 14 with a requirement to include at least one additional environmental and one social/governance indicator. The Draft RTS also provides for specific indicators, in addition to the required 14, for impacts from investments in sovereigns, supranational and real estate assets. While the introduction of specific indicators across three broad asset classes is a step in the right direction, this does not go far enough as other asset classes (i.e., investments in infrastructure) have been excluded and would benefit from tailored indicators. 

The Draft RTS also introduces the “new actions” concept which calls on financial market participants (“FMPs”) to provide a description of the actions taken during the relevant reference period and actions planned for the next reference period to mitigate or avoid the principle adverse impacts identified by the FMPs. This will allow FMPs to highlight the positive action taken in their efforts to engage with principal adverse impacts. 

When assessing these impacts for the next reference period, the Draft RTS notes that PASIs should be assessed on 31 March, 30 June, 30 September and 31 December. Where an FMP publishes the PASI statement for the first time, the FMP need not disclose information relating to a previous reference period. This means that the earliest information relating to a reference period to be disclosed in accordance with the Draft RTS would not be made until 2023 in respect of a reference period relating to 2022.

From 30 June 2021, large FMPs (those with more than 500 employees) must publish a statement on their website confirming that they will consider PASIs along with a summary of their policies and procedures and planed actions. However, what is unclear is how SFDR applies the 500-employee threshold for PASI reporting on parent undertakings of a large group. The ESAs have written to the Commission asking for urgent clarification on this issue.

Translation Requirement

The Draft RTS places an onerous translation requirement on FMPs. FMPs are now required to translate the summary section of their Article 4 SFDR PASI statement and the summary section of the website disclosure under Article 10 SFDR. The summary must be provided in one of the official languages of the home Member State of the FMP, and was different, in an additional language customary in the sphere of international finance and where a financial product of the FMP is marketed in a host Member State, one of the official languages of that host Member State. This undoubtedly places an additional burden on firms.


Another welcomed change is to the mandatory Article 8 and 9 template reporting requirements which have been simplified by the removal of the need to include a graphical representation of the investment proportions. The templates are prescriptive as to content and presentation and only allow for stylistic changes, for example, font type, size and colours.

Although the standardised templates could be said to allow for consistency in reporting against financial products, the ESAs voiced their concerns in the Draft Report over the challenges in preparing a single set of regulatory technical standards at the pre-contractual level across sectors (i.e., retail versus institutional clients). The ESAs have described the one-size-fits-all approach as sub-optimal leaving the disclosures “unfit for purposes for both types of documents”.

An additional requirement to the “do no significant harm” (“DNSH”) provision was also added. FMP’s, in their DNSH reporting, must now show whether investments are aligned with international standards including the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.


If an FMP refers to a green strategy in their marketing materials or if a product includes language that seemingly promotes environmental or social characteristics, FMP’s will be expected to make the pre-contractual and periodic disclosures associated with an Article 8 product. The ESAs have sought clarification from the Commission on the meaning of “promotion” in the context of products promoting environmental or social characteristics. We would assume that the Draft RTS has included this in an attempt to deal with practices of greenwashing.

Look-through principle

FMP’s will also be held to account through a new concept introduced in the Draft RTS referred to as the look-through principle. The aim is to prompt FMPs to look through to the underlying investments of, for example, collective investment undertakings and special purpose vehicles, in order to assess PASI. Unhelpfully, the ESAs state that FMPs that cannot obtain such information on the individual underlying investments of those companies, will not be considered to take into account the principal adverse impacts of their investment decisions on sustainability factors. This somewhat contradicts the notion in the Draft RTS that FMPs can disclose best efforts to find such information. Hopefully, this is something the Commission will pick up and offer clarity on.

Next Steps

The ESAs have voiced concerns in a number of areas and have acknowledged that further clarification is required on the interpretation of the SFDR.  In fact, a month before publishing the Draft RTS, the ESAs wrote to the Commission asking for urgent clarification on a number of key issues. In a letter, the ESAs set out priority questions that in their opinion need to be resolved in order to “facilitate an orderly application of SFDR from 10 March 2021”. In addition to the clarification questions already mentioned above, the priority areas are:

  • the application of the SFDR to non-EU Alternative Investment Fund Managers (AIFMs) and registered AIFMs;
  • the application of Article 9 of the SFDR in relation to products with sustainable investment as an objective; and
  • the application of the SFDR product rules to portfolios and dedicated funds.

At the time of writing, the Commission has not yet responded to the ESAs’ letter. The Commission has three months from the date of the publication of the Draft RTS to decide whether to endorse it. It will be interesting to see if the Commission adopts the Draft RTS in full, notwithstanding minor clarification points, or if the Commission will take issue with the ESAs new changes. All eyes are now on the Commission on whom we await further guidance regarding the ESA’s priority areas and on its approach to the adoption of the Draft RTS. 



Authored by Jochen Seitz, Markus Brusch, Rita Hunter and Simi Malhi


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