ESAs analyse the extent of voluntary disclosure of principal adverse impacts under the SFDR

Summary:

The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA, and ESMA) has published its second annual Report on the extent of voluntary disclosure of principal adverse impacts under the Sustainable Finance Disclosure Regulation (SFDR). The report aims to assess the current state of entity-level and product-level voluntary principal adverse impact (PAI) disclosures under the SFDR, and provides a preliminary, indicative, and non-exhaustive overview of good practices and areas that need improvement.

The report highlights an overall improvement in compliance with the SFDR requirements compared to the previous year, although significant variations still exist across financial market participants and jurisdictions. Disclosures are relatively easier to find on websites compared to the previous year, but there is a lack of transparency regarding the extent to which investments align with the Paris Agreement. The report also notes that financial market participants should provide better explanations when they do not consider principal adverse impacts.

The report includes a set of recommendations for the European Commission to consider ahead of the next comprehensive assessment of the SFDR. These recommendations aim to ensure that the regulation is effective in promoting sustainable finance and reducing the negative environmental and social impacts of investments.

The report also emphasizes the importance of voluntary disclosures of PAI consideration by financial products, which will be further analyzed in future reports. Overall, the report aims to promote transparency and accountability in the financial sector, and to support the development of sustainable finance practices.

Key Highlights:

1. Improvement in compliance with SFDR requirements compared to the previous year, although significant variations still exist.
2. Disclosures are relatively easier to find on websites compared to the previous year.
3. Lack of transparency regarding the extent to which investments align with the Paris Agreement.
4. Financial market participants should provide better explanations when they do not consider principal adverse impacts.
5. Recommendations for the European Commission to enhance the effectiveness of the SFDR.
6. Emphasis on voluntary disclosures of PAI consideration by financial products.

Background:

Principal Adverse Impacts (PAI) refer to the most significant negative impacts of investments on the environment and people. The EU’s Sustainable Finance Disclosure Regulation (SFDR) aims to promote sustainability and reduce the negative environmental and social impacts of investments by requiring financial market participants to disclose the principal adverse impacts of their investments. The regulation encourages financial market participants to consider PAI and to disclose their consideration of these impacts to investors and other stakeholders.