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SFDR: Article Alignment Principles and Regulation Updates

Financial market participants (FMPs) may have questions about SFDR compliance, regulation updates, and how their investments will be classified as sustainable. This blog aims to address those concerns, building on Schneider Electric's previous SFDR deep dive article and product-level disclosure article. This post provides a breakdown of product labeling principles and shares an update on expected future regulation changes.

Product Labeling Principles

Article 6, Article 8, and Article 9 are financial product classification names to foster transparency and accelerate capital toward sustainable business within the market. Among these three articles, higher article numbers represent increased product sustainability ambition. FMPs should keep in mind that product labeling under SFDR is not prescriptive, meaning that fund managers provide transparency about the funds by examining the funds’ existing objectives and characteristics and categorizing them appropriately. The product classification system and key definitions central to the product requirements are broken down below.

Article 6

These products do not traditionally integrate sustainability into their investment strategy. However, these funds must meet disclosure requirements through transparency about sustainability risks, including:

  1. How sustainability risks are integrated into investment decisions.
  2. The results of the assessment of the likely impacts of sustainability risks on the returns of the financial products they make available.
  3. If sustainability risks are not deemed relevant, then there should be clear and concise explanations of the rationale.

Furthermore, FMPs are expected to disclose principal adverse impacts (PAIs) at the product level, including:

  1. How a financial product considers PAIs on sustainability factors.
  2. A statement that information on PAIs on sustainability factors is available.
  3. If an FMP does not consider PAIs, it must specify this with a statement and rationale.

Key definitions

Sustainability risk: an environmental, social, or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment

Principal Adverse Impact (PAI): the most significant negative impacts of investment decisions. These relate to environmental, social, and employee matters, anti-corruption, respect for human rights, and anti-bribery matters.

Article 8

These products promote environmental characteristics, social characteristics, or a combination of those characteristics and follow good governance practices. Good governance practices are particularly concerning sound management structures, employee relations, remuneration of staff, and tax compliance. These products should also provide sustainability indicators that are used to measure the attainment of environmental or social characteristics that the financial product promotes. The specific criteria to determine if a product meets the Article 8 requirements can be found in the Regulatory Technical Standards (RTS). Article 8 products demonstrate greater sustainability ambition than Article 6 products, but they must also include sustainability risks and PAI integration disclosure as Article 6 does.

Key definitions

Environmental or social characteristics: aspects that have an impact on the environment or society

Regulatory Technical Standards (RTS):  A set of standards that outline the details of SFDR disclosure content, methodology, and presentation requirements. The RTS also includes reporting templates for product disclosures within its annexes.

Article 9

These products have a sustainable investment objective and demonstrate the greatest sustainability commitment among the articles. A sustainable investment is an investment in an economic activity that contributes to an environmental objective or a social objective. Environmental objectives may include indicators under the EU Taxonomy umbrella, such as energy, raw materials, waste, greenhouse gas emissions, biodiversity, circular economy, and water. Social objectives may include indicators that tackle inequality, enhance labor relations, or invest in economically or socially disadvantaged communities, among others. These investments must do no significant harm to any of the other objectives and must follow good governance practices. Similar to Articles 6 and 8, Article 9 products should also disclose sustainability risks and PAI integration. Additional specifications on Article 9 can also be found in the RTS.

Key definitions

Do No Significant Harm: For an economic activity pursuing one or more of the six EU Taxonomy-aligned environmental objectives to qualify as sustainable, it cannot cause significant harm to any of the other six Taxonomy objectives. The technical screening criteria (TSC) identify thresholds to define compliance with no significant harm for each activity. 

Technical screening criteria:  a set of rules that defines requirements and thresholds to evaluate whether an economic activity is considered environmentally sustainable within the EU taxonomy.

Future Outlook

If it seems like the product requirements outlined above still would benefit from additional regulatory clarity, then you may be pleased to hear that there are recent and ongoing developments to address SFDR's weaknesses. In September 2023, The European Commission launched two consultations, a public consultation on SFDR implementation and a targeted consultation on SFDR implementation. These consultation periods were aimed at addressing shortcomings of SDFR, including legal certainty, regulation usability, and its effectiveness in combatting greenwashing. The consultation period ended in December 2023 and resulted in proposed amendments published by the European Supervisory Authorities. Proposed changes encompass the following:

• An expanded list of social PAI indicators

• Technical revisions to the PAI indicator list

• Product disclosure GHG emissions reduction targets

• Streamlined templates

• Compliance with do no significant harm disclosure

• Harmonization of sustainable investment calculations

• Formatting changes for machine-readable disclosure

The EU Commission was given a three-month timeframe from December 2023 to review and decide whether to endorse the RTS draft as proposed or to adopt and modify some proposals. Following this review, there will be an additional scrutiny period of three months for the draft regulations that are expected to take place before final approval. Although the proposed changes are likely to be confirmed soon, it is expected that changes to SFDR will not apply before January 1, 2025.

Given the anticipated changes to SFDR, FMPs should be prepared to exercise adaptability to achieve compliance. FMPs can achieve this by streamlining their data collection efforts and keeping themselves updated with any changes to regulations. If your organization needs help with disclosure enhancement, Schneider Electric is here to help.

Feel free to reach out to our team to discuss how they can extend their support to your organization in meeting SFDR reporting requirements. 




Victoria Mansfield, Sustainability Consultant