ESAs ditch one mandatory social PAI in final proposal on SFDR tweaks

Finalised reforms to delegated regulation switch one proposed mandatory social indicator to voluntary, delete existing voluntary PAI.

Europe’s financial regulators have removed one mandatory social indicator in their final report setting out proposed changes to the SFDR delegated regulation.

In April, the European Supervisory Authorities (ESAs) proposed a series of changes to the SFDR delegated regulation, including simplification of reporting templates, new mandatory and voluntary social indicators, and a do no significant harm (DNSH) “safe harbour” to avoid conflicts between differing applications of the principle between SFDR and the EU taxonomy.

The regulators made a few adjustments to the list of mandatory social indicators, but the biggest change is switching disclosures on interference in the formation of trade unions or elections of workers from mandatory to optional. The formulation of the indicator has also been changed to look at the low coverage of collective bargaining agreements.

In their summary of market feedback, the ESAs said respondents had raised concerns over the availability of data for the metric, given that it is not required by the European Sustainability Reporting Standards (ESRS) and is not reported by EU or non-EU corporates.

Concerns were also raised that, as unionisation varies across countries, it was not up to the ESAs to implement a prescriptive approach to the definition of “interference”.

Switching the metric from mandatory to voluntary is likely to mean that few if any investors will report against it. A Responsible Investor analysis of principal adverse impact (PAI) reporting in August found that investors are overwhelmingly disclosing against a handful of voluntary indicators on the social side.

The Commission has three months to review the draft standards and decide whether to endorse them.

ESRS alignment

The ESAs made a series of other terminology and phrasing changes to new and existing environmental and social indicators to better align them with corporate disclosures under the ESRS.

They have also deleted an existing voluntary indicator covering the share of investments in entities without human rights due diligence processes, on the grounds that it might duplicate a mandatory indicator covering violations of the UN Global Compact Principles or OECD Guidelines.

The regulators also developed draft standards for the disclosure of emissions reductions targets for financial products. The standards apply to Article 9 funds which have emissions reduction as their investment objective, albeit with simplified disclosures for funds tracking Paris-aligned and Climate Transition Benchmarks.

Funds will be asked to disclose how they intend to achieve these targets. Disclosure options would include planned divestment of high-emitting assets, investments in assets that are expected to deliver emissions reductions or engagement with investee companies.

Some respondents to the consultation raised concerns about the timing of the reforms, given that the European Commission is currently reviewing the SFDR Level 1 regulations.

However, the ESAs said there was an expected time lag of several years between the review and any changes being made to SFDR. “The ESAs do not believe it is a viable option to do nothing, as some respondents suggested,” the report said.

The regulators also acknowledged significant negative feedback on their chosen social PAIs.

While industry respondents broadly agreed with the increased emphasis on social PAI indicators, the report said the majority disagreed with the proposed list.

The main reasons given were that it was “premature to add new indicators given the current challenge in reporting against the existing one, and that social PAIs might be better grounded with the release of a social taxonomy”.

The ESAs added that, while they were aware of the challenge of reporting against new indicators without corresponding corporate reporting standards, the mandate from the Commission had requested an extension of social PAI indicators, and as such they would be added.