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DEVLHON Consulting Decodes: The Challenges and Best Practices of SFDR Disclosures According to the Latest ESA Report
In the context of sustainable finance, disclosures on Principal Adverse Impacts (PAI) of investment decisions play a crucial role in ensuring transparency and accountability among financial actors. Published by the European Supervisory Authorities (ESA), the 2024 annual report on PAIs, in line with Article 18 of the SFDR regulation, provides an overview of disclosure practices and offers recommendations for improving their clarity and accessibility.
Context and Scope of the Report
The ESA report assesses the status of PAI disclosures at both the entity and product levels, based on a survey conducted with National Competent Authorities (NCAs). PAI disclosures are mandatory for market participants with more than 500 employees, while smaller entities may opt for voluntary disclosure, provided they use the Level 2 regulatory template.
Current Status: Notable Improvement, but Gaps Remain
According to the report, disclosure practices have improved, especially in terms of accessibility and quality of information, although compliance with SFDR requirements remains uneven. Significant progress has been noted in making information more accessible to retail investors and improving the quality of product-level disclosures. However, certain entities continue to face challenges, particularly regarding the application of PAI indicators and explanations for disclosure choices.
Best Practices and Recommendations
The ESA highlighted several examples of best practices that could inspire the entire financial sector:
Increased Accessibility: Disclosures are easier to locate thanks to dedicated sections on websites, facilitating information access for investors.
Clarity of Information: Entities that provide contextual explanations and use clear language offer a better understanding of their sustainable impacts.
Details on PAI Indicators: Comprehensive disclosures include required environmental and social indicators, along with explanations of actions taken to reduce negative impacts.
Challenges and Areas for Improvement
The report also underscores key areas for improvement. Among the challenges encountered:
Insufficient Explanations: Some entities provide little to no explanation for their choice not to consider PAIs, often citing resource issues without offering a plan for compliance.
Inconsistencies in Methodologies: Divergent methodologies used for calculating certain indicators make comparisons between entities difficult.
Engagement Policies: ESA noted that many engagement statements remain generic and require more detail to ensure transparency regarding actions taken with investee companies.
Conclusion
With clear recommendations for NCAs and market participants, the ESA report aims to enhance the coherence and quality of sustainability information. By adopting these best practices, companies can not only comply with SFDR requirements but also strengthen their sustainable impact and investor confidence.
