EU regulators cut number of mandatory reporting indicators in final SFDR draft

ESAs accused of bowing to asset managers, but sustainability forum argues data is not there yet for some indicators

Europe’s financial regulators have dramatically cut the number of sustainability indicators investors must report against as part of the EU’s Sustainable Finance Disclosure Regulation (SFDR).

Yesterday, the EU’s financial regulatory trinity – known as the ESAs – published their final draft technical standards on the SFDR, essentially filling in the details of the legislation that was passed in 2019 and requires investors to disclose adverse impacts on the environment and people. 

Under the requirements of the new draft standards, investors would have to report against 18 mandatory sustainability indicators, down from 32 in the previous version, with mostly social-based indicators being lost, including those around corruption, forced labour and human trafficking. 

Steven Maijoor, Chair of the ESAs Joint Committee, said that the latest draft of the technical standards “strike a careful balance”. 

“The ESAs have listened to the consultation feedback from stakeholders and have adjusted the proposed disclosures,” he explained. 

Maijoor is also Chair of the European Securities and Markets Authority (ESMA), one of the three ESAs. The other two are the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA).

Earlier this year, there was significant pushback from asset managers against the reporting requirements proposed in the first draft of the technical standards. Investors argued that there was not yet sufficient data, making reporting against some indicators unfairly onerous.

Even Europe’s sustainable investment forum Eurosif called on the ESAs to reduce the number of indicators to those where there was sufficient data.

The ESAs received “165 responses with over 3000 pages of written material” on the first draft, the regulators revealed.

UK-based campaign group ShareAction has responded to the latest draft by criticising the ESAs for bowing too much to industry demands.

Its Head of EU Policy, Maria Van Der Heide said that the concessions “significantly weaken the positive impact this legislation could have made” .

“The SFDR is a ground-breaking regulation that will, for the first time, force investors to account for their adverse impacts on people and planet. But the European authorities have made significant concessions to industry demands, first on the timing and now on the content of the technical standards,” she said. 

“The investment system can be a force for good, but not if regulators allow investors to dictate the terms of regulation.”

But Victor van Hoorn, Executive Director at Eurosif, told RI that the sustainable investment forum was not opposed to the reduction in mandatory indicators. 

“It’s not that we are against the indicators per se,” he said, “but there’s no point making something obligatory when we know the information is not good quality, that it doesn’t inform anyone – not clients, policymakers or asset managers”. 

“Overall”, Van Hoorn said, Eurosif is “very happy with the direction of travel”.

In the new draft, the ESAs have separated the “adverse indicators” by different investment categories: “investee companies”, “sovereigns and supranationals” and “real estate”.

There are now 14 mandatory indicators (nine environmental and five social) for investments in investee companies, two mandatory indicators (one environmental, one social) for investments in sovereigns and two mandatory indicators (both environmental) for investments in real estate – making a total of 18 mandatory adverse impact indicators.

A spokesperson for ESMA told RI that, in addition to mandatory indicators, investors must also choose “at least one environmental and one social indicator from the opt-in indicators”.

He said “all disclosures under that template will have at least 20 indicators reported on, consisting of 18 mandatory and at least two opt-in indicators”. 

It was also confirmed to RI that the amended draft now uses a definition of fossil fuels which covers “non-renewable carbon-based energy sources such as solid fuels, natural gas and oil”. Last year, concern was raised when the definition used in the previous draft  appeared to exclude oil & gas.

Van Hoorn said that Eurosif was not “particularly concerned” about the definition of fossil fuel used in the first draft, as it made no real practical difference. 

“If you look at what information you were going to disclose as a result of those indicators, you would have had the same information around exposure to oil & gas being offered up anyway.”

Van Hoorn also said he was pleased that the ESAs appear to have “clarified” in the new draft that ‘Article 8’ products – those that “promote” environmental or social characteristics – would not face the same additional disclosure requirements as ‘Article 9’ products – those that invest in green and social assets.

“This intentionality element, introduced across the text, makes a clear distinction,” he said. 

Van Hoorn was also happy to see the ESAs emphasise that, when funds are promoting the environment and social characteristics of investment strategies, only the “binding elements” should be included. 

The European Commission is expected to endorse the final draft in the next three months. 

Last year, the Commission announced that, while the principles-based requirements of the SFDR would come into effect on 10 March 2021, the implementation of the technical standards had been postponed.

The ESAs have proposed an implementation date of 1 January 2022, meaning that the first disclosure under the technical standards would not take place until 2023, the draft reveals.  

The ESAs have also announced that they will be publishing a “consultation on taxonomy-related product disclosures under the Taxonomy Regulation”, which will amend aspects of the SFDR.