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Freshfields Sustainability

| 8 minutes read

Reforms for Level 2 of the European sustainability disclosure framework: ESAs publish final report on revision of SFDR RTS

On December 4, 2023, the European Supervisory Authorities (ESAs) released their final report, focusing on a comprehensive review of the Regulatory Technical Standards laid down in Commission Delegated Regulation (EU) 2022/1288, commonly known as the Level 2 Regulation of the Sustainable Finance Disclosure Regulation (SFDR), with which they fulfil their initial mandate from the European Commission (EC) of April 2022 (the draft RTS). The report is based on a consultation paper published in April 2023 and incorporates consumer testing exercises across four Member States. The result is an array of proposed improvements and simplifications to financial product disclosure templates, in an attempt to answer stakeholders’ concerns about the SFDR.


The draft RTS settle several disputes that were discussed intensively in the finance industry prior to the publication of the first detailed mandatory statements of Principal Adverse Impacts (PAI) by financial market participants (FMPs) on June 30, 2023. While they provide welcome clarifications and simplifications to the templates, they also introduce some new layers of complexity. Since the devil is in the details, only the preparation of the first pre-contractual, periodic and website disclosures will show whether the new disclosures will be more manageable than the current ones. The draft RTS may still be adopted in Q1 2024 by the EC. As there is no indication in the final report whether there will be a transitional period, there is a chance that the draft RTS may apply shortly thereafter. 

Key proposals

Simplification of templates

Recognising the excessive length and complexity of financial product disclosure templates, the ESAs are actively seeking improvements in language, layout, and structure to enhance clarity, especially for retail investors. Proposed changes include the following:

  • The summary of product features at the beginning of the pre-contractual and periodic disclosure annexes, known as the "ESG-Dashboard", is extended beyond initial expectations during the consultation phase of the SFDR RTS' revision. It starts with an introductory statement in a text box about whether a financial product has a sustainable investment objective or promotes environmental/social characteristics. A second box aims to encapsulate the ecological/social characteristics or sustainability objectives of the product within a concise 500 characters, with the intention of drawing specifically retail investors' attention to the most vital information and mitigating the risk of information overload. This goes back to consumer testing conducted by the ESAs in France, the Netherlands, Italy, and Poland to refine the presentation of ESG information. Four additional text boxes highlight the four essential characteristics of a financial product complying with Art. 8 or Art. 9 SFDR: Sustainable investment commitment, Taxonomy-aligned investment commitment, PAI consideration, and commitment to GHG emissions reduction targets. The dashboard is proposed to be included in the summary section of the website disclosure.
  • The section on asset allocation (also known as “asset allocation tree”) is removed from both pre-contractual and periodic disclosure annexes. Additionally, the sections on sustainable investments shall no longer require financial products to split minimum commitments into those contributing to either environmental or social objectives. However, most of the information included in those sections would be part of the ESG Dashboard. For example, the 500-character description of products that comply with Art. 8 SFDR shall specify the share of investments that promote the relevant environmental and/or social characteristics of the product.

(See p. 121, 127 of the final report for a view of the envisaged “dashboard”)

Additional enhancements include clearer explanations for Taxonomy-alignment of investments with and without sovereign exposures, the display of information on whether the financial product has a GHG emissions reduction target and the option to extend electronically delivered disclosures by click, so that readers are able to extend the dashboard information to open the full template by clicking on the different sections of the dashboard on the first page.

Extension/modification of social PAI indicators

While the RTS were previously focused on environmental indicators, the draft expands its focus on social adverse impacts, which were not as comprehensively covered in the first version of the SFDR RTS. They introduce new mandatory social indicators like “amount of accumulated earnings in non-cooperative tax jurisdictions applying to investee companies where the total consolidated revenue on their balance sheet date for each of the last two consecutive financial years exceeds a total of EUR 750 M” (Table 1, new PAI 13), “exposure to companies active in the cultivation and production of tobacco” (Table 1, new PAI 15), “share of employees of investee companies earning less than the adequate wage” (Table 1, new PAI 16) and modify other mandatory social indicators, like “share of investments in investee companies that have been involved in violations non-respect of the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles, including the principles and 106 fundamental conventions identified in the ILO Declaration and the International Bill of Human Rights” (Table 1, PAI 10) and “unadjusted gender pay gap between female and male employees” (Table 1, new PAI 11). The modifications to PAI 10 and new PAI 11 as well as the new PAI 15 and 16 of Table 1 aim to align these social PAI disclosures with the newly adopted ESRS Standards (S1-17, S1-16, SBM-1, S1-10), for which social adverse impacts are also a significant area of focus.

The newly proposed social indicator on “interference in the formation of trade unions or elections of workers representative” was removed from the list of mandatory and added to the list of opt-in social indicators (i.e. non-mandatory social indicators of which the FMPs have to select at least one). In addition, the ESAs have made changes to the list of newly proposed opt-in social indicators and technical adjustments to other opt-in social indicators in Table 3. 

Lastly, the ESAs propose rather technical changes to environmental PAI indicators, including helpful clarifications to their formulae, which aim to align them with the ESRS Standards and reflect learnings from the first PAI statements published by FMPs earlier last year on June 30, 2023. 

Changes to the PAI disclosure framework

With their draft RTS, the ESAs have also provided their opinion on whether the basis on which the PAI indicators are calculated shall remain “all investments” or be changed to “relevant investments”, i.e., only those relevant for the specific PAI indicator. This was a source of heated debate in the industry during the preparation of the first comprehensive PAI statement on June 30, 2023. The ESAs propose to retain “all investments” as a calculation basis but justify their approach less with substantive arguments than with path dependence. Although the ESAs state that the amendments to the RTS should not pre-empt changes in the broader EC’s review of the SFDR or hamper a historical comparison of PAI values, it remains to be seen if the Commission would take a completely different approach when publishing its proposed SFDR review.

Presumably compensating for retaining “all investments” as a calculation basis, the ESAs keep their proposal to include a mandatory disclosure of the share of PAI that is based on data directly received from investee companies and the share that is estimated (or reasonably assumed), which is currently only a voluntary good practice disclosure in accordance with the ESAs Consolidated Q&A on SFDR (no. IV.5). In addition, new and adjusted formulae to calculate certain PAI indicators are proposed, along with technical changes or clarifications to the current PAI indicators, the treatment of investee companies’ value chains, and, in particular, derivatives in PAI disclosures. Regarding the latter, even the EU legislator admitted that there are no reliable methods for determining the extent to which investments entered into through derivatives are risk positions for environmentally sustainable economic activities. The draft RTS do not resolve this issue. They merely retain the proposal from the consultation paper to convert derivatives into equivalent positions in the underlying assets in accordance with the methodology set out in Art. 8 and Annex II of Commission Delegated Regulation (EU) No. 231/2013. However, acknowledging significant negative feedback on the proposed carve-out for derivative transactions without physical exposure to the underlying, the ESAs have excluded this provision from the draft RTS in the final report.

New GHG emission reduction targets disclosure

Despite the primary objective of simplifying disclosures, the ESAs are proposing an additional layer of complexity by including additional disclosures in pre-contractual documents, websites, and periodic reports for products with GHG emission reduction targets, requiring a maximum interval of five years between targets. Simplified disclosures apply for products that passively track EU Climate Benchmarks. 

The draft RTS encourage the use of the Partnership for Carbon Accounting Financials (PCAF) Standard for measuring financed GHG emissions, on which EFRAG and the EC also built for the development of the ESRS. The additional disclosures on decarbonisation targets cover diverse aspects, including details on the relevant decarbonisation target, progress monitoring, and transparency on the use of carbon credits, aiming to ensure consistency and comparability across financial products. 

Calculation of sustainable investment share

The draft RTS include a new Article 17a, specifying two methods for calculating the share of sustainable investments in financial products and formalising the EC's guidance in Q&A. In April 2023, the EC (rather unexpectedly) clarified that the share of sustainable investments can be calculated both at the economic activity or investment level (i.e. the numerator would consist of either a look-through into the economic activities contributing to objectives or investments in entire companies, while the denominator would be the market value of all investment, as for the share of Taxonomy-aligned investments). Furthermore, the draft RTS introduce a new disclosure on the selected method for the calculation of the sustainable investments of a financial product in the pre-contractual, website and periodic disclosures.

Overarching efforts

Despite not being the focus of their mandate, the ESAs have put forth additional proposals, acknowledging weaknesses and issues in the currently applicable framework:

Enhanced DNSH principle disclosure

The ESAs refrain from longer-term revisions to the disclosure of PAI-related Do No Significant Harm (DNSH) thresholds, although they have acknowledged support for specific disclosures related to how financial products address PAI indicators for DNSH in the consultation period of the draft RTS. They propose two changes: First, the upcoming draft RTS will include a requirement to disclose in the website disclosure the thresholds or criteria for the PAI indicators that the financial product uses to determine that its sustainable investments comply with the DNSH principle. Second, the draft RTS confirm the "safe harbor" approach for taxonomy-aligned investments, as previously clarified by the EC in their Q&A, proposing to include a standardised statement that Taxonomy-aligned investments are automatically considered sustainable investments next to the “dashboard”.

Revised disclosure for products with investment options

For financial products with various investment choices (so-called “multi-option products”, “MOPs”), the draft RTS introduces special “dashboards” in two new separate annexes, which shall also be included in the summary section of the website disclosure. They include summary information on the underlying investment options, which shall cross-reference and be directly linked to specific SFDR disclosures for each investment option at the underlying investment option level. In addition, the draft RTS propose that FMPs disclose individual disclosure templates for each underlying investment option where the investment option promotes environmental or social characteristics or has a sustainable investment objective, irrespective of its qualification as stand-alone financial product under the SFDR. Only investment options that qualify as financial instruments according to Section C of Annex I MiFID II and are not units in collective investment undertakings shall be excluded. 


The draft RTS by the ESAs, which are also referred to as “SFDR 1.5”, are best understood as a bridge or a quick fix to solve the rather urgent issues posed by SFDR, which has been heavily criticised by FMPs since its formal adoption in 2019, without pre-empting those issues which are currently being tackled by the EC in the context of the comprehensive revision of the SFDR itself (“SFDR 2.0”). The consultation on that review, which closed for submissions on December 15, 2023, explored potentially significant changes to the structure of the SFDR. The EC will now examine the different contributions received to the public consultation before deciding on next steps.


financial institutions, regulatory, sustainable finance