Report on the extent of voluntary disclosure of PAI under SFDR


On 28 July 2022, the European Supervisory Authorities (ESAs) have published, through the Joint Committee (JC), a report (the Report[1]) to the European Commission (EC) on the extent of voluntary disclosure of principal adverse impact (PAI), in accordance with Article 18 of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (SFDR).

According to such article, 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). By 10 September 2022 and every year thereafter, the ESAs shall submit a report to the Commission on best practices and make recommendations towards voluntary reporting standards. That annual report shall consider the implications of due diligence practices on disclosures under this Regulation and shall provide guidance on this matter”[2].

In relation to the preparation of the Report, the ESAs have conducted, in March-April 2022, a survey asking the national competent authorities (NCAs) for feedback through a series of questions. Also not explicitly covered by the legal text, the ESAs have also decided to ask NCAs for their feedback on the disclosures made by financial market participants (FMPs) explaining why they do not consider adverse impacts of investments decisions on sustainability factors, in line with article 4(1)(b) SFDR. However, conversely, the Report does not yet cover disclosures required under Article 7(1) SFDR, as these will only be applied as from 30 December 2022.

Key findings of the Report

Overall, the ESAS’ findings show that level of compliance significantly varies across respondents and generally that when FMPs belong to a larger group, this leads to a higher level of compliance.

Moreover, the ESAs outline that, while some FMPs include unnecessary and potentially misleading information in their due diligence statement disclosures that are not required under PAI disclosures, others insufficiently describe the reasons for not considering PAI; the most common reasons stated being, inter alia, the uncertainty and incompleteness of regulatory requirements, the lack of information and clear methodology on how to obtain data from issuers, and the expensive nature of processes to implement. In that respect, a number of NCAs noted that they will follow-up individually with FMPs to inquire the reason for not considering PAI when the reason is not clear enough.

The ESAs have also reported a low level of disclosure of the degree of alignment with the Paris Agreement, which, when provided, remains very vague.

The Report finally highlights the difficulty for FMPs to determine whether they fall under the obligations of Article 4(4) SFDR[3] – i.e. the derogation for parent undertakings with an average number of 500 employees, and the ESAs therefore invite FMPs to consult the EC’s Q&A of July 2021[4] including clear interpretation on this topic.

Best practices

Based on their findings so far, the ESAs have put together a preliminary, indicative and non-exhaustive overview of best and less good practices for disclosures under Article 4(1) (a) and (b) SFDR.

With respect to Article 4(1)(a) SFDR, the ESAs encourage FMPs to give as many details as possible on the methodology used for the assessment of adverse impacts and, to the extent applicable, details on the reasons of alignment with the Paris Agreement, notably on decarbonisation objectives as a way to disclose PAI of investment decisions.

FMPs should not include ESG elements which are not relevant for an Art. 4(1)(b) SFDR statement and hence potentially misleading for investors (e.g. consideration of sustainability risks, exclusion policies or ranking of the counterparties based on ESG factors).

Furthermore, a clear explanation about why the FMP does not consider PAI should be provided and, when invoking a current lack of relevant data available on the market, the FMP should include details on whether and when the FMP plans to consider adverse impacts by reference to the sustainability factors.

Recommendations to NCAs

The Report also includes several preliminary recommendations to the NCAs in their ongoing supervisory actions, including inter alia:

  • continuous market supervision to identify non-compliant FMPs;
  • filing of subsequent surveys based on a greater sample size of FMPs to ensure representativeness of the sample;
  • regular surveys in their own market to enhance supervision;
  • organisation of offsite inspections of FMPs;
  • use of IT tools allowing an easier assessment; and
  • additional instructions to supervised entities regarding technical aspect of website disclosures.

Next steps

It will be interesting to follow whether the EC will take the ESAs’ findings into account in any future intermediary evaluation on the functioning of the SFDR. Moreover, the findings outlined in the Report may also be useful for the ESAs in the development of regulatory technical standards on principal adverse impacts indicators, for which they have received a new mandate on 28 April 2022[5].

Aurélien Hollard - Partner | Avocat à la Cour

Julie Pelcé - Managing Associate

Julien Robert - Professional Support Lawyer | Avocat à la Cour

[1] https://www.esma.europa.eu/sites/default/files/library/jc_2022_35_-_joint_esas_report_on_the_extent_of_voluntary_disclosures_of_pai_under_sfdr.pdf

[2] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R2088&from=fr

[3] 5 Article 4 (4) SFDR: By way of derogation from paragraph 1 of this Article, from 30 June 2021, financial market participants which are parent undertakings of a large group as referred to in Article 3(7) of Directive 2013/34/EU exceeding on the balance sheet date of the group, on a consolidated basis, the criterion of the average number of 500 employees during the financial year shall publish and maintain on their websites a statement on their due diligence policies with respect to the principal adverse impacts of investment decisions on sustainability factors. That statement shall at least include the information referred to in of paragraph 2.

[4]  https://www.esma.europa.eu/sites/default/files/library/sfdr_ec_qa_1313978.pdf

[5] https://www.eiopa.europa.eu/document-library/letter/mandate-esas-develop-sfdr-regulatory-technical-standards-principal-adverse_en