SFDR Regulatory Technical Standards
Three European financial regulatory agencies issued documents to modify the Regulatory Technical Standards (RTS) of the Sustainable Financial Disclosure Regulation (SFDR) to make policies more applicable to the financial industry.
The agencies involved in this revision SFDR Regulatory Technical Standards are the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). The regulators have already cooperated under European Sustainability Reporting Standards.
Expand the List of PAI Social Indicators
The regulatory agencies believe that SFDR does not cover too many social indicators related to Principal Adverse Impact (PAI). Therefore, in this revision, the regulators proposed some mandatory social indicators, such as employee income below the appropriate wage, violations of the OECD Principles for Multinational Enterprises, gender pay gaps, etc. Compared with the previous SFDR, these modifications are more stringent, but can help users obtain more information in future ESG information disclosures.
In addition to the new indicators, the regulatory agency has also modified some social indicators, such as the incidence of work-related injuries that can be recorded, the use of younger-age labor supply, the number of fines imposed by regulatory penalties, etc. The goals of these changes are to maintain consistency with existing terminology and to clarify issues faced in real-world applications of some complex definitions.
Improve the Definition and Calculation of PAI
Regulators have also made some changes to the definition, methodology and expression of PAI in SFDR Regulatory Technical Standards. For example, when calculating the greenhouse gas intensity of a sovereign country, the indicator of gross domestic product is needed. This revision adjusts the simple GDP indicator to the GDP indicator under purchasing power parity. This adjustment can reduce the impact of exchange rates on GDP, focus on the actual production scale of the economy, and allow for fairer comparisons.
In addition, on the regulations about Do Not Significant Harm (DNSH), which is closely related to PAI, the regulator has not made actual changes, but hopes that financial products can make more specific disclosures. In the future, financial institutions will be mainly responsible for DNSH disclosure, and the disclosure threshold may be involved in subsequent amendments to SFDR.
Modify Greenhouse Gas Emission Reduction Targets
To enable the financial sector to set, monitor and disclose its greenhouse gas emission commitments, regulators consider that greenhouse gas emission reduction targets should be reviewed at intervals that are less than five years. All products with an investment goal of reducing greenhouse gas emissions are required to make regular disclosures, including how they promote emission reduction activities and whether there is a possibility of delays in achieving the goals.
Financial institutions need to choose between a range of possible emissions reductions, such as reducing carbon emissions through portfolio reallocation, or reducing carbon emissions through a decline in actual emissions at the asset level. These options can enhance comparability between different products and make it easier for individual investors to understand their actions.
The new RTS also requires disclosures for investments in sovereign bonds. Since analysis of sovereign bonds is often based on multiple macro indicators, separate disclosures can enhance the accuracy of carbon emissions calculations. In addition to sovereign bonds, data on other products can be disclosed on a voluntary basis and aggregated by asset management companies.
Regulators have also simplified templates for financial product disclosures and introduced dedicated dashboards to disclose key information in SFDR Regulatory Technical Standards. These measures help investors access important contents while providing detailed data. The dashboard will incorporate four basic elements: sustainable investments, taxonomy-compliant investments, major adverse impacts, and greenhouse gas reduction targets.