EU Sustainable Finance Disclosure Regulation: An Update

  • The market is preparing to comply with the Sustainable Finance Disclosure Regulation in March this year, a landmark new European regulation following the EU Sustainable Finance Action Plan. 
  • The final published report on the regulatory technical standards for this regulation by the European Supervisory Authorities should put to rest some of the main concerns and questions raised in the last several months. 
  • Sustainalytics and Morningstar are ready to support clients in complying with the various elements of the required ESG disclosures and provide a comprehensive suite of SFDR and other EU regulatory solutions and services. 

Final Report on Technical Standards

The Sustainable Finance Disclosure Regulation (SFDR) requires all financial market participants in the EU to disclose ESG issues, with additional requirements for products that promote ESG characteristics or that have sustainable investment objectives. This regulation aims to reduce the risk of greenwashing by financial market participants while increasing transparency, making it easier for end investors to understand how ESG and sustainability factor into their investments.

In the first week of February, the European Supervisory Authorities (ESAs) delivered their much-anticipated final report on the regulatory technical standards (RTS) for the SFDR. The previous version of this report, the ESA consultation paper, triggered numerous questions and concerns in the industry and led to a significant volume of consultation responses. The ESAs themselves had questions even as late as mid-January, evidenced by their letter to the European Commission, showing just how complex this piece of legislation is. Simultaneously, the response rate and public interest clearly show how ambitious and ground-breaking this regulation is. It truly is a gamechanger, and it is redefining ESG disclosures.

Key Changes

Though a significant number of important changes and clarifications were madearguably, not all the concerns raised in the process have been addressed. Even the ESAs noted in their report that some of the compromises are less than ideal. [1] Our Morningstar paper on the SFDR, which will be published in a few weeks’ time, will explore the final report on technical standards in more detail – here are the highlights. 

Principle Adverse Impact (PAI) PAI is an important concept in the regulation that now has even more prominence and interconnectedness in the final report. It requires a narrativebased disclosure under the level 1 regulation and reporting on a pre-defined list of PAI indicators under the RTS. These are the key changes and clarifications regarding PAI: 

  • The timeline for entity level reporting on PAI indicators for those who take PAI into account was moved to June 2023, reporting over the reference period in 2022. Note that the requirement to disclose whether and how PAI is considered under the level 1 regulation still takes effect on March 10th, 2021 and having data on PAI indicators can support complying with that requirement.
  • Reporting is required on at least four measurement points during the reference period (March, June, September, and December),. Still, the calculations are no longer required on a daily basis (as we expected would happen as per Sustainalytics’ previous blog on the SFDR).
  • The number of mandatory PAI indicators are reduced significantly from 34 to 18, although the comprehensive list, including voluntary indicators, is largely the same as before. For the voluntary indicators, financial market participants should choose based on materiality considerations.
  • PAI indicators for sovereigns and real estate assets are now included. 

Increased Alignment with EU Taxonomy and the EU Benchmark Regulation: 

  • The SFDR concept of ‘dnsignificant harm’ has been linked to the concept of Principle Adverse Impact and the EU Taxonomy Minimum Safeguards. Note that the SFDR’s do no significant harm’ concept is different from the Taxonomy’s Do No Significant Harm criteria which are more detailed and environment-focused for the time being. Exactly how one determines what level for a PAI indicator would be acceptable and what would constitute ‘significant harm’ is not entirely clear in the absence of a standard, threshold or benchmark.
  • There is now significant overlap between the ESG indicators that ESG benchmarks must report on under the EU Benchmark Regulation, particularly on the sovereign indicators. Nonetheless, there are still substantial differences where better alignment would have been easier for financial market participants, index providers as well as end investors. 

Use of benchmarks: 

  • It has become clear that article 8 and article 9 products that use a reference benchmark to attain environmental or social characteristics, or a sustainable objective, need to disclose the sustainability indicators relevant to justify that the benchmark aligns with the E and S characteristics or objective of the product. Also, comparison with the sustainable performance of a relevant broad market index must be included. While not mandatory, it appears that not using an ESG benchmark, particularly for an article 9 product, becomes harder to explain. 

How can Sustainalytics and Morningstar help?

The combined expertise of Morningstar and Sustainalytics makes us the premier partner for financial professionals looking for the data coverage, trustworthy research, and flexible reporting capabilities they need to respond to the regulatory demands of the EU Action Plan. 

Our SFDR PAI data package covering most of the corporate and sovereign PAI indicators will launch in the coming weeks. We are committed to expanding the coverage in 2022. Beyond data on the PAI indicators, we have a broad suite of ESG data, research and services that can support with complying with some of the key aspects of the SFDR: 

  • ESG research on sustainability risks with supporting screening tools can assist with the policy statements on integrating sustainability risks in investment decisions and risk management. 
  • Research on corporate governance, a foundation for the definition of ‘sustainable investment’ in SFDR.
  • ESG data and metrics for reporting on the attainment of ESG characteristics of article 8 products or the sustainable investment objectives of article 9 products.
  • Engagement Services, an important way to take action related to principle adverse sustainability impacts.
  • Global Standards Screening and EU Taxonomy Solution to support the ‘do no significant harm’ principle and the requirement to disclose which international standards and norms are adhered to. 
  • Morningstar ESG indexes that can support the attainment of environmental or social characteristics or objectives. 

Furthermoreonce asset managers start to disclose productlevel data starting in March 2021, Morningstar will collect and disseminate this information across the market on funds that self-identify as article 8 and 9 funds. 

 For more information, please reach out through your preferred client service contact. We have a Guidance Document available upon request with detailed information on how to use our research and data for various elements of the regulation. More information can also be found on our EU Action Plan Resource Center and stay tuned for Sustainalytics’ upcoming webinar on EU Action Plan products and solutions. 

Anne Schoemaker, Associate Director, Product Strategy & Development Sustainalytics


[1]  Feedback from the public survey and consumer testing on the pre-contractual and periodic financial product templates confirmed that the information was too complex for retail investors, but the presentation was too simple for institutional investors. However, the ESAs believe the RTS strike a workable compromise within the very difficult constraints of the SFDR documents listed in Article 6(3) – Final Report on draft Regulatory Technical Standards, p.7-8

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