New Social and Climate Targets Disclosures for Financial Products Are Established by EU Regulators

With proposals for new mandatory reporting on social factors like exposure to tobacco production and inadequate wages, as well as new financial product disclosure of greenhouse gas (GHG) emission reduction targets, Europe’s three main financial regulatory agencies, the European Supervisory Authorities (ESAs), announced the publication of their Final Report amending the draft Regulatory Technical Standards (RTS), completing their review of key disclosure rules for financial products under the Sustainable Finance Disclosure Regulation (SFDR).

The EU Action Plan on Financing Sustainable Growth includes the EU SFDR. The goal of the regulation is to create uniform guidelines for advisers and investors in the financial market with regard to transparency in terms of integrating sustainability risks, taking negative sustainability effects into account during the process, and providing sustainability-related information about financial products.

The release comes in response to the European Commission’s request in April 2022 that the ESAs examine the Regulatory Technical Standards (RTS) outlined in the SFDR legislation, together with its financial product disclosures and primary adverse impact (PAI) indicators. The ESAs notified the Commission in November 2022 of a 6-month delay in their evaluation, compared to the original 12-month deadline.

One of the main modifications suggested by the ESAs assessment is adding a number of social indicators to the list of PAIs, which describes the detrimental effects of investment choices on sustainability issues. The OECD Guidelines for Multinational Enterprises have been violated by some companies, so new mandatory PAI indicators include “employees earning less than an adequate wage,” “exposure to companies active in the cultivation and production of tobacco” (which updates a prior indicator related to tobacco use), and indicators for the gender pay gap between male and female workers.

Additionally, the authorities created a draft RTS that includes additional disclosures for financial products about GHG emissions reduction objectives. This draft RTS is applicable to products whose investment purpose is to reduce emissions.

The regulators have proposed additional changes to the SFDR regulation, including technical adjustments, a simplification of the templates for pre-contractual and periodic disclosures, and enhancements to the disclosures regarding how sustainable investments “Do No Significant Harm” (DNSH) to the environment and society.

The European Commission will have three months from the date of the ESAs’ report to choose whether to approve the draft RTS.