Response to the ESAs consultation on the review of the SFDR delegated regulation

04 July 2023

Consultation response

On 4 July 2023, Finance Watch responded to a joint consultation from the ESAs on the Review of SFDR Delegated Regulation to:

  • extend the list of social principal adverse impact (PAI) indicators,
  • refine the definition and formulas of existing adverse impacts,
  • introduce the reporting of GHG emissions reduction targets in the SFDR product templates,
  • clarify DNSH disclosure design options,
  • simplify the SFDR product templates.

Finance Watch welcomes the ESAs work to improve the transparency and clarity of the SFDR-related disclosures. Currently, investors are still left in uncertainty to fully understand the sustainability level of financial products and financial market participants. In its response, Finance Watch took a conservative approach in order to consider the risk of misinterpretation by the investors and prevent accidental or voluntary underestimation of adverse impacts. Consistency, rigor and clarity are important for the investors to clearly understand the reported information. Finance Watch therefore welcomes the proposed adaptations made to the PAI definitions and the introduction of new formulae, and comments on certain propositions to achieve the best results.

In particular, Finance Watch supports the inclusion of mandatory social PAI indicators that will bring consistency with CSRD and cover important matters for investors and other stakeholders. However, the inclusion of new indicators also emphasizes the importance of starting a revision of ESG MiFID level 3. Moreover, an attention point remains on the availability of the data as the Commission has included, in the draft CSRD delegated acts, the proposed social PAI indicators as being subject to a materiality assessment.

Concerning the treatment of derivatives, having distinctive approaches between the positive impact of the financial products (Taxonomy alignment and proportion of sustainable investment) and the PAI indicators is an important clarification, but the exclusion in the case where the FMP can show that the derivative does not ultimately result in a physical investment by the counterparty could create a loophole through the use of cash-settled derivatives instead of physically-settled derivatives.

Finance Watch also strongly supports the introduction of disclosures on GHG emissions reduction targets and the methodology to reach those targets as it could contribute to giving the possibility to investors to invest in impactful financial products. We however believe that the four blocks from the dashboard (taxonomy alignment, percentage of sustainable investment, PAIs and GHG emissions reduction targets) could bring confusion with the current 3 sustainability-related preferences of ESG MiFID and ESG IDD. In that context, we believe that ESG MiFID and IDD delegated acts should integrate this additional notion to the sustainability preferences.

Finally, Finance Watch takes the opportunity to reiterate the importance of clarifying the notion of sustainable investment, although this would require reopening SFDR level 1. The flexibility given by the Commission indeed allows very different methodologies, which ultimately reveals a great disparity between products with the same SFDR classification and disclosing the same level of sustainable investment. As a result, SFDR opens the door to greenwashing practices.

Read the consultation response