ICQ Log - Consumer Protection

Sustainable Finance Disclosures Regulation:   



Last Updated: 10 September 2021

On March 10, 2021, Regulation (EU) 2019/2088 or the Sustainable Finance Disclosures Regulation (SFDR) came into effect. The SFDR was introduced as part of the EU Commission’s Action Plan for financing sustainable growth. It aims to provide more transparency in relation to the sustainability of financial products to potential investors so they can make informed decisions in relation to sustainable investing, while preventing greenwashing (false claims of the positive environmental effects of investments).


In this article, the ACOI’s Consumer Protection Working Group discuss the current (level 1) regulation requirements and the upcoming (level 2) requirements that are due to be implemented by 1 July 2022.

The Level 1 requirements apply to financial market participants (FMPs) (credit institutions & investment firms providing portfolio management services, pension providers, fund managers and insurance undertakings providing insurance-based investment products (IBIPs)) and financial advisors (FAs). In-scope financial products include investment and mutual funds, IBIPs, private and occupational pensions and insurance and investment advice. In-scope firms were required to review products and services to determine whether they were:

  1. Investments with a specific sustainability objective (Article 9 Product);
  2. Investments that promote environmental and/or social characteristics (Article 8 Product);
  3. All other products (i.e. no particular environmental, social, or governance (ESG) focus).

Disclosures to clients depend on product classification and all in-scope financial products have to disclose in pre-contractual disclosures (PCDs), information on whether and how sustainability risks are considered. FMPs and FAs also have to disclose how they integrate sustainability risks in their investment decision-making or investment advice process.

Remuneration policies had to be reviewed to ensure that the were consistent with the integration of sustainability risks, a summary of which must be published on the firm’s website.

FMPs have to publish and maintain on their websites a comply or explain statement as to whether they consider principal adverse impacts (PAI) of investment decisions on sustainability factors, a statement on due diligence policies with respect to those impacts or outline clear reasons for why they do not consider adverse impacts. The statement should be underpinned by a documented PAI Policy.

FAs have a similar obligation where they had to publish and maintain on their websites a similar comply or explain statement outlining how they consider principal adverse impacts on sustainability factors in the advice provided. Again, any statement made on the website should be underpinned by a PAI Policy.

While these are not yet finalised, the main proposals in the RTS relate to:

Entity-level Principal Adverse Impact Disclosures

Principal adverse impacts that investment decisions have on sustainability factors will need to be disclosed on the firm’s website, in the form of a statement outlining how investments adversely impact indicators, defined by the European Supervisory Authorities (ESAs) in relation to:

    1. climate and environment; and
    2. social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects.

This PAI Statement will have to be published on the firm’s website on 30 June each year in respect of the previous reference year. This will require FMPs to describe the adverse impact of their investment decisions on sustainability factors that qualify as principal in a quantitative manner. This will require firms to source data inputs relevant to the investment decisions they are making and to be able to interpret this data to populate the prescribed template in a way that is clear for clients/ investors to understand. Data sources may include external market research providers, internal financial analysts and specialists in the sustainable investments area, internally commissioned studies, publicly available information and/or industry information.

For firms who have implemented a PAI Policy from 10 March, this will need to be reviewed with relevant changes made, once the process for gathering the information and defining key performance indicators, if relevant, have been determined.

Product Level Disclosures

Additional disclosures relating to the sustainability characteristics or objectives of financial products must be disclosed in an annex to the existing PCDs that were introduced in March, in the periodic reporting to clients and on the website. The RTS provides mandatory templates to ensure consistency of approach across impacted firms and to allow for easy comparison between investments. The PCDs will detail how the product meets the environmental or social characteristics/objectives they claim to achieve. The periodic reports will advise clients the extent to which the products met the environmental or social characteristics by using relevant indicators. For products with sustainable investment objectives, the periodic reports will have to specify how that objective was met, i.e. where the stated objective is a reduction in carbon emissions, the disclosure will have to provide information as to whether this was achieved and detail in relation to the reduction.

In order to complete the PCDs and website disclosures, firms should look at the products that they have defined as Article 8 products under the Level 1 Regulation and determine whether they make “sustainable investments”, as defined in SFDR. To invest in a sustainable investment, a product must:

    1. Invest in an economic activity that contributes to an environmental or social objective; and
    2. The investments must do no significant harm to other environmental or social objectives; and
    3. The investee companies must follow good governance practices.

Firms will then have to define what indicators are used to measure how the environmental or social characteristics are being attained for each product.  

Considerations for Compliance can range from outsourcing (if the data providers used are providing outsourced services), review and challenge of outputs prior to publication, and ensuring that staff members in the Compliance function have the appropriate level of knowledge and education in this area to be in a position to provide meaningful review and challenge. There may also be a need for training to be provided to staff in relation to the new requirements and ongoing communications to remind staff of the existing Level 1 requirements and to raise awareness of the Level 2 requirements, which may require input from Compliance.

The SFDR is one measure in the EU Commission Action Plan, and therefore, there is interplay with other regulations that are in various stages of implementation at this time, for example,

  1. Taxonomy Regulation,
  2. Non-Financial Reporting Directive,
  3. Markets in Financial Instruments Directive (MiFID2) amendments requiring clients sustainability objectives to be sought, recorded and incorporated into any investment advice provided to the client to ensure that their sustainability objectives are met,
  4. Shareholders Rights Directive, and
  5. Corporate Sustainability Reporting Directive.

One thing is certain, with the increasing number of climate change related phenomena impacting the world, investors and society in general holding firms accountable to higher standards of ethical and civic responsibility, higher expectations in terms of governance and accountability for those in positions of authority, and political focus on climate change, fair trade and human rights, sustainability and ESG considerations are going to be a development area for firms for years to come.


ICQ Autumn Edition 2021

This article was taken from the ACOI's ICQ Autumn Edition 2021