ESMA produces Final Report on SFDR RTS

On December 4th, 2023, the European Securities and Markets Authority (ESMA) produced its final regulatory technical standards (RTS) regarding the Sustainable Finance Disclosure Regulation (SFDR).

The SFDR is a comprehensive set of standards aimed to increased transparency around green financial products and financial market participants’ activities in the EU. The SFDR was first drafted in 2019 and has a series of deliverables in tranches sinch 2021; its impact typically cascades down from financial services companies to private equity firms, public investee companies, and large private companies.

What are the key takeaways for the financial services sector and investee companies?

Financial Sector: The draft technical standards focus on a number of key areas, including: the addition and refinement of technical definitions around mandatory indicators to be disclosed, the requirement to provide greater clarity around the achievement of GHG emissions reduction, and enhancements to simplify client reporting.

Public & Private Companies: Changes in the technical criteria may lead to questions from your private equity firms, investors, and ratings agencies around the parameters surround ESG calculations of GHG emissions, water usage, hazardous waste, and others. Furthermore, a requirement to disclose what % of data is reported by companies versus what is estimated may prompt additional disclosure requests from those key partners. Lastly, an emphasis on social indicators may require you to gather additional data internally around wages, alignment with key ESG frameworks, and board diversity.

What are the key changes in the final draft?

Principal Adverse Impact (PAI) changes:

  1. Extension of social principal adverse impact (“PAI”) indicators: originally, the SFDR contained 18 mandatory indicators covering both environmental and social impacts. The finalized RTS adds two mandatory PAIs: Exposure to companies active in the cultivation and production of tobacco and Share of employees of investee companies earning less than the adequate wage. Additionally, the non-cooperative tax jurisdiction PAI now has a consolidated revenue threshold of EUR 750mm. Lastly, the verbiage has been amended slightly on the PAI concerning alignment to OECD Guidelines for Multinational Enterprises and UN Guiding Principles in addition to the ‘unadjusted gender pay gap’ definition on that PAI.
  2. Changes to technical definitions for environmental PAIs:
    1. Carbon footprint & GHG Intensity – change denominators to express as ‘per million EU invested’ (carbon footprint) and per million EU of revenue of investee companies (GHG intensity).
    2. Exposure to companies active in the fossil fuel sector – change the definition to align with the EU Taxonomy definition of revenues derived from fossil fuel activities.
    3. Energy consumption – change from GwH to MwH to provide more substantive data to the end user.
    4. Others – changes to non-renewable sources of energy, emissions to water, hazardous waste and radioactive waste, deforestation, and sovereign GHG intensity.
  3. Disclosure of share of estimate: Reporting entities should include, for each PAI, the % of data coming directly from investee companies and the % of data that is estimated.

GHG Emissions Reduction:

  • Regulatory standards drafted to align reduction commitments to a maximum of 5-year intervals, as specified in the Paris Agreement
  • Verbiage requirements to present reduction targets in both pre-contractual and perioding reporting disclosures in simplified language; furthermore, a third set of disclosures has been added.
  • Additional information on how the reduction target will be achieved, primarily through/:
    • Financed GHG emissions reduction through portfolio reallocation – divesting from assets with GHG emissions and intensity exceeding determined thresholds.
    • Financed GHG emissions reduction via delivery of GHG reduction at investee company or asset level, achieved through:
      • Investment in assets that are expected to deliver GHG emissions reduction over the duration of the investment.
      • Engagement with investee companies to contribute to the emissions reduction.
  • Allowance for reporting of volumes of carbon credits, alongside relevant certification and environmental integrity/quality of credits.

Do No Significant Harm (DNSH):

  • The RTS includes a requirement to disclose PAI thresholds or criteria for how financial products ensure that its sustainable investments comply with the DNSH principle
  • Under the auspices of the European Commission’s June 2023 Q&A around safe harbor provisions for taxonomy-aligned investments, the RTS includes a section confirming that any taxonomy-aligned investments will be considered sustainable.

Pre-Contractual and Periodic Reporting Simplification:

  • Introduction of a ‘dashboard’ on the first page of pre-contractual and periodic reporting documents to simplify a product’s Article 8/9 designation, Taxonomy Alignment, PAI consideration, and GHG emissions reduction targets.
When does this take effect?

The European Commission has until 4 March 2024 to endorse the changes. Thereafter, the changes would take effect 20 days after the final publication in the Official Journal of the European Union.

Who’s in scope?

Financial market participants currently required to produce entity-level PAI reporting in addition to financial products with an Article 8 (promoting environmental or social characteristics) or Article 9 (sustainable investment objective) designation.

What should in-scope entities do right now?
  1. Review the PAI calculation technical criteria with their internal teams and external data providers.
  2. Substantiate how your products will quantify financed emissions as a baseline to establishing an emissions reduction glidepath.
  3. Examine how you’re using PAIs and if you’ve established any thresholds to comply with the DNSH disclosure requirement.
  4. Identify if you have a mechanism to track whether a PAI data point from a company is reported or estimated.
  5. Review the ‘dashboard’ changes to your design of pre-contractual and periodic reporting disclosures in addition to the new Annexes (VI and VII).

About the Authors

Matt Hartman is the Senior Environmental, Social and Governance (ESG) and Sustainability Manager with the Schneider Downs Risk Advisory Practice. Matt has more than 10 years of experience in corporate sustainability and reporting, development of ESG programs and ESG data sourcing and governance and has previously delivered initiatives in line with the Task Force on Climate-Related Financial Disclosures (TCFD), the Global Reporting Initiative (GRI), and the Sustainable Finance Disclosure Regulation (SFDR), amongst others. Matt can be reached at [email protected]

Tony Ielase leads the firm’s Risk Advisory Services (RAS) practice for the Columbus market and has over 25 years of experience providing risk advisory and compliance services to a diversified number of retail, manufacturing, higher education, healthcare, technology, utilities and financial services clients. His areas of expertise include internal audit strategic planning, internal audit co-sourcing, enterprise risk management, compliance assessments, fraud risk assessments, business process improvement and SOX program implementation and optimization, among others. Tony can be reached at [email protected]

About Schneider Downs ESG Consulting

With our industry expertise and extensive knowledge of the risk advisory landscape, the Schneider Downs team can help your organization perform a gap assessment relative to the finalized regulation, suggest areas of improvement and meet the the SFDR disclosure requirements.

Learn more about our ESG consulting services at or contact the team at [email protected].

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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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