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Latest updates and evolutions regarding the SFDR regulatory framework

The Sustainable Finance Disclosure Regulation (SFDR) entered into force on March 10, 2021, fully implemented as at 01st January 2023, continues to evolve in order to respond to the market questions and fill the gap between regulation and market practices.

On 5 April 2023, the European Commission published its response to eight questions on the interpretation of SFDR that were submitted by the ESAs to the Commission on 9 September 2022. The Commission has also revised and amended its previous Q&A in order to ensure consistency.

The European Commission has issued amendments to the SFDR to clarify the classification of investment products as Article 8 or Article 9 funds. The amendments state that the SFDR does not prescribe a single methodology for sustainable investments and that Article 8 and Article 9 funds are two distinct product categories, with Article 9 funds needing to have "sustainable investment" as their objective.
The European Commission has clarified the definition of “sustainable investments”, the objective of carbon emissions reduction (art. Article 9 (3)), the promotion of carbon emissions reduction (art. 8) and the “consideration“ of PAIs (art. 7 (1)).

On the definition of “sustainable investments” the European Commission clarifies that the definition does not prescribe any specific approach to determine the contribution of an investment to environmental or social objectives but Financial market participants must disclose the methodology they have applied to carry out their assessment of sustainable investments. It specifies that the notion of sustainable investment can therefore also be measured at the level of a company and not only at the level of a specific activity and finally it reiterates that SFDR does not set out minimum requirements that qualify concepts such as contribution, do no significant harm, or good governance, i.e. the key parameters of a ‘sustainable investment’ but leaves to financial market participants to carry out their own assessment for each investment and disclose their underlying assumptions.

On the objective of carbon emissions reduction the European Commission clarifies SFDR is neutral in terms of product design and that financial products with a carbon emissions reduction objective can fall in its scope whether they are actively or passively managed. Additionally the Commission reminds that SFDR is a transparency regulation and that SFDR does not prescribe the use of a Paris-aligned Benchmark nor a Climate Transition Benchmark but were none is passively tracked then a detailed explanation is required on how the continued effort of attaining the carbon emissions reduction can be ensured.
On the promotion of carbon emission reductions the European Commission makes it clear that Article 8 SFDR funds are able to promote carbon emissions reductions as part of their promoted environmental characteristics without falling within Article 9 (3) SFDR, provided that investors are not mislead in believing that this aspect is part of the fund’s objective.

Finally, on the consideration of PAIs provides further details on the meaning of the “consideration” stating that the description related to the adverse impacts should include both a description of the adverse impacts and the procedures put in place to mitigate them.
On the other side questions are still open concerning SFDR RTS. For this reason on 12th April 2023, the ESAs, under the mandate of the European Commission, published a joint consultation paper on the review of the SFDR RTS regarding PAIs and financial product disclosures. The objective is to propose amendments to the SFDR RTS in order, amongst other, to streamline and further develop the regulatory framework
The proposed changes include extension of the list of universal social indicators for PAIs; refinement of the content of a number of the other indicators for adverse impacts and their respective definitions, applicable methodologies, metrics and presentation and Introduction of disclosures on decarbonisation on GHG emissions reduction targets. Additionally it could be demanded changes in DNSH disclosure design options and simplification of the templates.
The consultation is open until 4th July 2023 after which the ESAs will present their proposals to the Commission for its review and issue of amendments.

Following these publications and consultations, CSSF reviewed its own Q&A on SFDR publishing an updated version on 5th May 2023.
The conclusion is that the year 2023 will be again a challenging year for all investment managers. On one side some aspects have been clarified but also it becomes clear that the European Commission charges the financial market participants of an increased responsibility towards the investment community as they need to take their own positioning and justify it on several aspects. On other side they need to wait for the changes that will be probably disclosed during last quarter of the year before setting up their reporting and information to investors. 

Gianluca D’Alessio,

Head of Portfolio Management


Nicoletta Morsut
Conducting Officer

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