Sustainable Finance 1/2020: Curtain up!

Sustainable Finance Series 1/2020

Curtain up on the disclosure of sustainability-related information in the financial services sector (SFDR)

Authors: Martina Rangol, Miroslav Duric, Laura Weinhardt (PwC GmbH WPG)

The European Regulation (EU) 2019/2088 on sustainability-related disclosure requirements in the financial services sector, the so-called Sustainable Finance Disclosure Regulation (SFDR), was published in the Official Journal of the EU on 9 December 2019. SFDR transforms the first milestone of the Commission’s Action Plan on Sustainable Finance into directly applicable supervisory law.

The SFDR complements the core of the Commission’s Action Plan on Sustainable Finance: the future regulation establishing a framework to facilitate sustainable investment, the so-called EU Taxonomy. Their adoption is expected in the first quarter of 2020 following the political agreement in December.

The third regulation in the alliance is Regulation (EU) 2019/2089 amending the EU Benchmark Regulation. It introduces uniform parameters for two GHG-Emissions (Carbon-related) indices as well as sustainability-related disclosure requirements for all other kinds of indices (except interest rate and currency indices).

Scope of application

Affected by the requirements of the SFDR are financial market participants and financial advisors, both terms that are newly introduced into supervisory law by the SFDR.

Financial market participants include investment firms and credit institutions engaged in financial portfolio management, AIF and UCITS management companies (including managers of EuVecas, EuSEFs, and ELTIFs), but also insurance undertakings offering insurance investment products (IBIP), e.g. in the form of unit-linked life insurance.

Financial advisors include, inter alia, investment firms and credit institutions, AIF and UCITS management companies, as well as insurance companies and insurance intermediaries providing investment advice in relation to MiFID II financial instruments or insurance advice in relation to insurance investment products. Special rules apply to institutions for occupational retirement provisions (IOPRs).

Type, scope and form of disclosure of sustainability-related information

Which due diligence obligations companies in the financial services sector will have to fulfil under the SFDR in future and which sustainability-related information a company must disclose in which form is determined by its role as a financial market participant or financial advisor. Where a company is active both as a financial market participant and as a financial advisor, the requirements of the SFDR applicable to the activity in question will apply.

Financial advisors with fewer than three employees are exempt from the requirements of the SFDR.

Consideration of sustainability risks and sustainability factors

As a minimum standard, the SFDR requires both financial market participants and financial advisors to disclose information on how sustainability risks are dealt with in investment decisions and in investment and insurance advice, both at company and product level, regardless of whether an investment pursues sustainability objectives or not.

„Sustainability risk“ within the meaning of SFDR is an environmental, social or governance event or condition that could have an actual or potential material adverse effect on the value of the investment. The BaFin „Merkblatt zum Umgang mit Nachhaltigkeitsrisiken“ (Instruction Sheet on Dealing with Sustainability Risks) of 20 December 2019, which focuses on risk management, provides cross-sectoral guidance and lists numerous examples and possible questions for illustration purposes.

Furthermore, sustainability factors must be taken into account in remuneration policy and published in accordance with sector-specific regulations. SFDR defines „sustainability factors“ as environmental, social and labour concerns, respect for human rights and the fight against corruption and bribery.

Both minimum requirements of the SFDR must be met by financial market participants and financial advisors as of 10 March 2021.

Additional disclosure requirements, e.g. for investments to promote environmental or social characteristics or sustainable investments, will be introduced at a later stage:

Source: PwC GmbH WPG

High demands on sustainable investments

The highest demands are placed on financial market participants who offer financial products whose investments are intended to pursue a sustainable investment objective in the environmental or social fields (so-called sustainable investments). For sustainable investments, detailed information on sustainability-related objectives, including any benchmarks used, must in future be included in the contracts, e.g. fund prospectuses or KIDs. In addition, the periodic reports must give account of the achievement of the sustainability goals.

SFDR and Non-Financial Disclosure Directive

Listed companies as well as credit institutions and insurance companies with an annual average of more than 500 employees, have to fulfill the sustainability-related obligations under the SFDR in addition to the obligation of non-financial reporting or non-financial declaration under the Consolidated Accounts Directive (Directive 2013/34 EU, amended by the the Non-financial reporting Directive – NFRD 2014/95). With a roadmap on NFRD published in January 2020, the Commission has opened the stakeholder dialogue for NFRD’s revision. Furthermore, on 20 February 2020 the Commission launched a public consultation with a detailed questionnaire on NFRD’s update.


Which characteristics so-called sustainable investments within the meaning of SFDR must fulfil in detail on the basis of the future EU taxonomy or which key indicators (KPI) shall be used to evaluate the achievement of the sustainable investment objective will be finally determined when the future regulatory standards (RTS) for EU taxonomy are formulated, initially with a focus on combating and adapting to climate change. The adoption of those RTS is foreseen by 31 December 2020 with the aim of application from 31 December 2021.

Parallel to the work on EU taxonomy, financial market participants and financial advisors should not lose sight of the planned changes to the MiFID II Delegated Regulation (Regulation (EU) 2017/565), the IDD (Directive (EU) 2016/97) and the Level II measures on AIF(M)D (Regulation (EU) 231/2013) and UCITS (Directive (EU) 2017/43). The corresponding drafts from the Commission are also expected in Q1/2020. Work is also in full swing on an EU Ecolabel Standard under the EU EcoLabel Regulation (Regulation EU No 2010/66) for „green“ mutual funds, initially limited to equity and bond funds (also as mixed funds or ETF).

Do you have any questions about the Commission’s Action Plan on Sustainable Finance or the requirements of the SFDR in detail?

We would be pleased to support you in further processing and analysis of the effects on your company. Just talk to us.

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