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ESAs first annual report on the current state of voluntary disclosures of PAI under the SFDR

The European Supervisory Authorities (ESAs) have recently published their first annual report on the voluntary disclosure of Principal Adverse Impact (PAI) under the SFDR. Findings and recommendations summarized in the report are based on a spring 2022 survey of national competent authorities (NCAs).

Desislava Marvakova
August 3, 2022

Shortly after the SFDR Regulation was officially published in the official journal, the Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published the first annual report on the extent of voluntary disclosure of principal adverse impact under the Sustainable Finance Disclosure Regulation (SFDR) – Article 18 of Regulation (EU) 2019/2088.

Article 18 in connection to Article 4 from the Sustainable Finance Disclosure Regulation (SFDR)

Article 4(1)(a) of the Sustainable Finance Disclosure Regulation (SFDR) requires Financial Market Participant with more than 500 employees to disclose on their website the so called PASI (Principal Adverse Sustainability Indicators) Statement, prepared on an entity level. The core of this statement are the Principal Adverse Impacts of the positions where the FMP is invested in (also via its investors).  

Article 4(1)(b) of the same regulation sets the requirement that, where an FMP does not consider adverse impacts of investment decisions on sustainability factors, it must publish and maintain on its website clear reasoning on why it does not do so, and where relevant, information as to whether and when it intends to do so.

Article 18 states that “The ESAs shall take stock of the extent of voluntary disclosures in accordance with point (a) of Article 4(1) and point (a) of Article 7(1).” The ESAs are also obliged to "submit a report to the Commission on best practices and make recommendations towards voluntary reporting standards” on a yearly basis.

In spring 2022 the ESAs launched a survey of the National Competent Authorities (NCAs) with the aim to gather feedback on the current state of entity level voluntary disclosures under Article 4 (1) point (a) SFDR. In addition, the ESAs also collected feedback about FMPs choosing to explain why they do not consider adverse impacts of investment decisions on sustainability factors as per Article 4 (1) (b) SFDR.  

The highlights of the report can be summarised in the following three points:  

  • the first disclosures after the application of the SFDR are not very detailed: this is expected to change starting from next year when the SFDR Delegated Regulation with the concrete PASI Statement template applies;
  • there is an overall low level of disclosure on the degree of alignment with the objective of the Paris Agreement: in case the disclosure of alignment is made, it is often vague
  • there is a low level of compliance with the details required for explaining why financial market participants do not take into account the adverse impact of their investment decisions

Based on the analysis of 33 responses the ESAs developed good examples of best practices and preliminary recommendations.  

Good examples of best practices include

  • Providing PASI Statements and making these disclosures easily accessible on websites  
  • Providing a clear description of the process concerning consideration of PAI although data availability is still limited. This shows efforts towards consideration of PAI while acknowledging the lack of data in certain fields
  • Providing details on decarbonisation objectives as a way to disclose PAI of investment decision

Preliminary recommendations

the ESAs are not making recommendations with regards to the SFDR requirements to the Commission at this stage, as practices of FMPs are expected to become more easily comparable with the application of the Delegated Regulation.  

Instead, the ESAs have made recommendations for NCAs to ensure an appropriate supervision of FMPs’ practices. These include:

  • Continuous market observation to identify FMPs that are not compliant with the voluntary disclosures and ensure compliance with Article 4 (1) (a) and (b) SFDR
  • Greater sample size and more details in reporting figures
  • Regular own market surveys/questionnaire: The ESAs encourage NCAs to undertake regular surveys in their own market to determine whether supervised entities comply with the Article 4 SFDR disclosures
  • offsite inspections during the course of the year to identify regulatory breaches
  • Use of IT tools for easier assessment
  • additional instructions to supervised entities regard technical aspects of website disclosures

In terms of next steps, the Commission may consider the ESAs’ findings and take those into account in any preliminary evaluation on the functioning of the SFDR. The ESAs may also consider the findings in the work on the new mandate received on 28 April 2022 to review the PAI framework.  

The ESA’s will consider all the level 2 requirements on the PASI Statement In the next year’s report and will also incorporate Article 7 in their analysis.  

cleversoft Services

This report does not have any direct impact on the content of cleversoft’s SFDR Service.  

Our Regulatory Watch team is closely monitoring any further developments on the SFDR and Taxonomy regulations. We offer standardised services on the full range of all relevant SFDR disclosure requirements.  

Benefit from our SFDR service with the different modules for your pre-contractual, periodic, web disclosure and PASI statement. We also offer modules covering the generation and collection of EET files.  

As part of our compliance commitment towards our clients, we provide regulatory updates in due time. If you have any questions, feel free to contact us: our experts will gladly advise you on the details.