SFDR’s Principal Adverse Impacts Indicators on course to change


The European Commission has given the European Supervisory Authorities (“ESAs”) a mandate to review the SFDR Delegated Regulation indicators for principal adverse impact and the financial product disclosures in relation to decarbonisation.

Principal adverse impact indicators

In relation to the principal adverse impact indicators, the European Commission has invited the ESAs to:

  1. streamline and develop further the regulatory framework;
  2. consider extending the lists of universal indicators for principal adverse impacts, as well as other indicators; and
  3. refine the content of all the indicators for adverse impacts and their respective definitions, applicable methodologies, metrics and presentation.

The guiding principle for the amendments is set out as the reduction of the risk of ‘false certainty’ and potential ‘safeguards washing’ by requiring well-substantiated evidence that investments align with the safeguards, and that implementation and application efforts do take place. However, the European Commission does also request that the amended SFDR regulatory technical standards (“RTS”) are carefully calibrated so that disclosures based on the indicators are proportionate and feasible for financial market participants.

The areas under the spotlight are those ‘that extend beyond the environment’, alongside decarbonisation actions.

Transparency by financial products

The ESAs are also invited to propose amendments to SFDR’s RTS in relation to decarbonisation targets throughout the disclosures in pre-contractual documents, on websites and in periodic targets. The European Commission sets this out to include intermediary targets and milestones where relevant, and actions pursued. It is also requested that the EU’s Taxonomy Regulation is considered in the amendments.

In the SFDR RTS published in April 2022, there had been a change from previous versions with financial market participants being required in relation to all adverse sustainability indicators to disclose “actions taken, and actions planned and targets set for the next reference period” rather than only “actions taken” in the principal adverse sustainability impacts statement (“PASI”). It will be interesting to note how the proposals from the ESAs, when formulated, set out more granular forward-looking disclosures in relation to decarbonisation across the pre-contractual, website and periodic report disclosures, alongside the forward-looking actions to be disclosed in the PASI.

Further observations

The European Commission expects that with developments in a novel and fast evolving area like sustainable finance disclosures there will be regular adaptations of the SFDR RTS to reflect increased demand for high quality sustainability-related information and to promote supervisory convergence. With the European Commission also giving the ESAs the task of proposing specific disclosures under SFDR in relation to exposure to investments in certain fossil gas and nuclear activities, the regulatory landscape is certainly looking to be dynamic and regularly shifting.

For more information, please see here or contact Laura Houet or Rachel Lowe.