The landscape of sustainable finance is undergoing rapid transformation, fueled by a global commitment to Environmental, Social, and Governance (ESG) considerations. Central to this evolution is the Sustainable Finance Disclosure Regulation (SFDR), which assumes a pivotal role in fostering transparency and accountability among investment funds managers (IFMs). On September 28, the European Supervisory Authorities (ESA) unveiled their second report on voluntary disclosure of Principal Adverse Impacts (PAI) under SFDR (hereafter, "the 2023 Report"), as mandated by Article 18 of SFDR. This report specifically concentrates on Article 4(1)(a) and Article 7(1)(a), exploring the impact of due diligence practices on SFDR disclosures. This comprehensive report delves into various aspects, revealing both positive trends and areas that demand improvement.

Embracing Diversity in Compliance

One striking observation from the report is that the extent of the disclosures is diverse among IFMs. Larger entities, buoyed by their resources and capacities, tend to present more intricate and detailed disclosures compared to their smaller peers. This diversity underscores the importance of acknowledging the varying capabilities of IFMs in meeting comprehensive reporting requirements. Understanding and addressing these differences will be instrumental in fostering a more encompassing and effective regulatory framework.

Grasping Regulatory Complexity

A positive trend identified in the report is the noticeable improvement in the understanding of regulatory requirements among IFMs. As the financial industry grapples with the complexities of sustainability disclosures, the report indicates a significant improvement in how IFMs interpret and implement these regulatory obligations. This growing comprehension signifies a maturation in the industry's approach to integrating sustainability considerations into its operational fabric.

Best Practices and Hurdles on the Horizon

The ESA meticulously outlines several best practices and challenges in the 2023 Report. A commendable practice involves IFMs indicating a target date, symbolising a concrete commitment to sustainability goals. Clear statements that articulate PAI indicators, methodology, data sources, reference periods, and engagement policies are identified as essential components of transparent reporting.

However, on the flip side, a noted challenge is the concealment of PAI information on websites. Instances where such crucial information is hidden behind vague labels like "required information" or buried in the "download" section of the website are recognised as detrimental practices. This lack of transparency poses a potential hindrance to stakeholders seeking access to critical sustainability data.

Anticipating Future Trends

Looking ahead, the ESA emphasises the need for further analysis in the upcoming iterations of the report, with a particular focus on the voluntary considerations made by financial products. This commitment signifies ongoing scrutiny and refinement of sustainability disclosure practices. By doing so, the regulatory framework can adapt proactively to emerging trends and challenges in the ever-evolving landscape of sustainable finance.

Recommendations Charting the Path Forward

The report offers valuable recommendations directed at both the European Commission (EC) and National Competent Authorities (NCAs). A significant proposal is the review of the 500-employee threshold as a measure of proportionality. The ESA advocates for alternative approaches based on the size of IFMs' investments, ensuring a more nuanced and relevant criterion.

NCAs are encouraged to play a proactive role in ensuring compliance among market participants. The ESAs recommend follow-up actions with non-compliant entities, employing appropriate enforcement tools for corrective actions. Additionally, building expertise within NCAs is highlighted as crucial for thorough compliance checks. This proactive involvement of NCAs is essential in reinforcing the regulatory framework and ensuring adherence to sustainability disclosure standards.

Clarity in Terminology

In addressing the intricate distinctions between 'consider' and 'take into account,' the ESAs identify a prevalent confusion within specific disclosures. The Level 1 text indicates that compliance with Article 4(1)(a) and (b) involves verifying whether IFMs have adequately considered PAIs on sustainability factors. 'Take into account' specifically relates to SFDR disclosure related to how sustainable investments Do Not Significantly Harm (DNSH) environmental or social objectives. This distinction is thus mostly relevant to Article 8 funds investing in sustainable investments and to Article 9 funds, as having a sustainable investment objective.

The Commission's clarification underscores that 'considering PAIs' requires IFMs to disclose their strategies for addressing adverse impacts, such as efforts towards reduction. In contrast, 'taking into account PAIs' for the DNSH test mandates a focus on indicators of adverse impact solely for sustainable investments, ensuring they avoid causing significant harm to the environment or society. This nuanced distinction is crucial for precise and meaningful reporting, aligning disclosures with regulatory intent and promoting transparency within sustainable finance practices.

Ensuring Consistency

Proper usage of terms like ESG criteria, ESG risk, and sustainable investment goals is underlined for precise and meaningful reporting. Notably, ESAs propose aligning product-level disclosures with entity-level practices under Article 7 SFDR, urging a comply-or-explain model. Discrepancies exist, as IFMs may declare PAI consideration at the entity level without reflecting it in product disclosures. To enhance analysis, they recommend reducing the Article 18 SFDR Report frequency, aligning with the proportionality principle. However, these proposals await complete information on IFMs below the 500-employee threshold complying with Article 4(1)(a) SFDR.


In conclusion, the 2023 Report serves as a compass guiding IFMs and regulatory bodies toward a more transparent and accountable era in sustainable finance. By recognising best practices, addressing challenges, and offering constructive recommendations, the report contributes significantly to the ongoing dialogue on the crucial intersection of finance and sustainability. As the financial industry navigates this evolving landscape, the insights gleaned from the report will undoubtedly shape the future trajectory of voluntary disclosure of PAIs.

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