New RTS under the SFDR: a joy or a burden?

On 4 December 2023, the ESAs published their final report on draft RTS on the review of PAI and financial product disclosures in the SFDR Delegated Regulation. This report addresses the review of the Principal Adverse Impact (PAI) indicators and the review of sustainability disclosures for financial products as described in the Sustainable Finance Disclosure Regulation (SFDR) Delegated Regulation.
In this final report, a number of changes are proposed to the current delegated regulation 2022/1288.

These are, in brief, the following changes proposed:

• PAI indicator from Annex I are modified, added and explained.
• Finanical market participanten making sustainable investments will have to disclose the thresholds or criteria for the PAI indicators used by the finanical product to determiner whether the sustainable investments comply with the so-called DNSH principle
• Introduction of new transparency obligations in case the financial product intends to reduce greenhoude gases
• The pre-contractuil and periodic templates are restructured and shortened

A lot of changes, but what does this mean to your financial institution? It depends on the type of product you offer to your clients. In our article about product qualification, you can find more information on the different products. In this article, we will explain the consequences of the changes for pre-contractual information for each product category.

A straightforward Article 8 product

What do we mean by this? This is a product that promotes environmental and/or social features, but does not make (environmentally) sustainable investments, nor does it have a target to reduce funded greenhouse gas emissions. We will return to products that reduce funded greenhouse gas emissions later.

For a straight-up Article 8 product, not much will change. The biggest impact will be transferring the information from the current pre-contract template to the new template. This is because the ESAs have proposed a number of changes to the product templates. These changes should make the templates more readable for investors. For instance, the ESAs have restructured the information from the templates to avoid repetition of information. In addition, a dashboard is introduced at the beginning of the template so that key information can be read directly on the first page of the template. In addition, as a result of restructuring and adding the dashboard, the existing texts will have to be slightly modified in certain places.

Finally, it is made clear that the information must be available in the inline XBRL format so that it is also machine-readable.

Conclusion:
No new obligations, but an administrative impact, because texts will have to be rewritten and dashboard will be added.

A product that makes sustainable investments

What do we mean by this? These are the article 8 products that in addition to promoting ecological and/or social features also do sustainable investments in part, so-called article 8+ products and products that have a sustainable objective, so-called article 9 products.

For these products, there are slightly more changes. Also for these products, a new template is available and the current information must be transferred to this template. There will also be a new obligation for these products. Currently, a financial market party making sustainable investments only has to indicate how it takes into account the PAI indicators from Annex I. Soon, these parties will also have to describe the thresholds and criteria used to determine that the sustainable investments do not significantly harm environmental or social objectives and how these are determined. This means that more information on the investment (selection) policy must be given.

Finally, new PAI indicators are being introduced by the ESAs, so financial market participants making SRI investments should also consider and include these new indicators in their investment (selection) policies.

Conclusion:
Besides an administrative impact, policies for assessing whether an investment is sustainable will also have to be adjusted.

A product with an objective to reduce greenhouse gases

What do we mean by this? These are Article 8, 8+ or 9 products, which aim to reduce funded greenhouse gas emissions. An example are products that have pathway to net-zero by 2050.

For these products, there are a lot changes. Besides the additional administrative impact and additional obligations mentioned above if SRI investments are made, new obligations are introduced.

First, additional disclosure obligations are introduced if the product has a greenhouse gas reduction target. The ESAs have tried to balance the need for detailed, decision-oriented disclosures for professional investors with the need for understandable, summarised information suitable for retail investors. For that reason, disclosures on the greenhouse gas reduction target should be made in several documents:

1. In the pre-contractual information (annex II and III), easily readable information must be disclosed. This information should ensure that investors understand:
   • the outcome that the product aims to achieve
   • the ambition level of the financial product, especially regarding the alignment of the objective with the reduction goal to limit global warming to 1.5 degrees Celsius
   • how the investment strategy will help achieve the objective(s)
2. In the periodic reports (annex IV and V), information on the progress of the emission reduction objective should be included. These reports should provide investors with information on:
   • the progress made up to that point
   • how the investment strategy has contributed to this progress
   • potential delays in achieving the objective(s) and the possible necessary adjustments to be made.
3. On the website, more detailed information should be posted to complement the pre-contractual and periodic disclosures. Cross-references to the website should be included in both the pre-contractual information and the periodic reports.
   
   

Level of ambition and outcome

The financial market participant, should visually display its ambition level, both in figure and table. In doing so, it should indicate its baseline, its intermediate targets and its end goal. Importantly, if the duration of the product is longer than five years, there should be a maximum of five years between the various intermediate targets.

	Greenhouse gas (GHG) emission reduction targets
Baseline year	Percentage reduction in emissions compared with the baseline year (as a  % of the GHG emissions)
[Baseline year]	[Date of expected achievement of intermediate target]	[Add columns for other intermediate targets, where applicable]	[Date of expected achievement of the final target]
[Financed GHG emissions expressed in  tCO2-eq/€M, not including GHG removals and storage and credits,	–[x]%	–[y]%	–[z]%
investments excluding sovereign bonds]   [VALUE] tonnes of CO2 emissions per million of euro invested excluding sovereign bonds
[Sovereign bonds only, not including carbon removals and storage and carbon credits]   [VALUE] tonnes of CO2 emissions per million of euro invested in sovereign bonds	–[x]%	–[y]%	–[z]%

The above values may only be calculated in one way, namely in terms of financed greenhouse gas emissions. Where only gross greenhouse gas emissions may be shown. It is also stipulated that greenhouse gas emission reduction targets are set on the basis of all relevant investments. This always includes investments in the following asset classes: listed shares and corporate bonds, government bonds, corporate loans and unlisted shares, project finance, commercial real estate, mortgages and car loans. Financial products from other asset classes may also be added to this list tomorrow. This is allowed if the financial market participant considers the investments to be relevant and discloses the standard or methodology used to do so.

Investment strategy

As indicated above, the financial market participant should indicate how the investment strategy contributes to achieving the reduction target. Several approaches are possible:

• Reallocation of investments: investments with high GHG emissions are replaced by investments with lower emissions
• Reducing current emissions: emissions from investments are reduced over the life of the investments, by investing in assets (e.g. companies, projects or governments) that are expected to reduce greenhouse gas emissions from their activities
• Engagement: by working with investee companies to influence their decisions to reduce greenhouse gas emissions.
• Other: a strategy that the financial market party may decide for itself.

Incidentally, several approaches may also apply to a product. Information on the reduction strategy should be displayed via a “tick the box” so that investors can easily compare products.

Website
As indicated above, the website should have very detailed information on the reduction target. First of all, the website from the pre-contractual information should be reproduced one-to-one on the website. In addition, detailed information about the targets and calculations should be included. This should be done using a mandatory number of headings.

Conclusion:
Detailed and far-reaching obligations are introduced for products that want to reduce greenhouse gases.

Where to go from here?

At the moment, it is not yet clear when the new rules will come into force. Our expectation is that this will take some time. To stay informed when this will happen, you can subscribe to our newsletter. Our newsletter will be sent out monthly with all relevant Risk & Compliance news.

The efforts expected of you will be greatest if your product has already set targets to reduce financed greenhouse gases, or is planning to do so. In that case, familiarize yourself with the new rules beforehand. Projective Group can always help you with this. Want to know how? Don’t heistate to contact us.