Review of the EU Sustainable Finance Disclosure Regulation

The SFDR aims to set up a disclosure regime on sustainability for financial market participants such as asset managers, pension funds, insurance companies, financial advisers, to scale up their consideration of negative environmental or social risks and impacts in investment decisions or financial advice. In April 2023, the European Supervisory Authorities launched a consultation which proposes amendments to the existing standards specifying the content and methodology for the reported information, including in respect to reporting on social adverse impacts (human rights and labour rights). Later in the year, in September 2023, the European Commission launched a different consultation seeking stakeholders´ input on the usability of the regulation and its potential for tackling green and social washing.

The Institute submitted responses to the two consultations in July and December 2023, respectively. The submissions primarily focus on:

• The need for alignment with international standards. By restricting reporting to a set of pre-defined indicators, the regulation sets a lower standard for disclosure than what is expected under the UN Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises. Financial market participants should be required to describe their own identification of main human rights risks and impacts in recognition of the fact that the principal adverse impacts of most relevance to their activities may well differ from the ones represented through the mandatory and optional indicators.
• Need for policy coherence. While the efforts to seek closer alignment with the metrics in the draft Environmental and Social Reporting Standards (ESRS) published by European Financial Reporting Advisory Group (EFRAG) in November 2022 to enable compliance with the Corporate Sustainability Reporting Directive (CSRD) are welcome, a more sophisticated and nuanced approach to connecting the two EU-level disclosure frameworks is still needed.
• Concrete suggestions for strengthening the list of social indicators. We recommend the expansion of the list of mandatory and optional social indicators and the re-evaluation of certain indicators whose formulation might inadvertently lead to inconsistent reporting by financial market participants.
• Need for guidance on the social dimension of sustainable investment. We recommend the development of criteria to support investors in understanding which economic activities can be reported to contribute to social sustainability. While such criteria are available for the environmental dimension through the Taxonomy technical criteria, there is a real guidance and information gap for the social dimension of sustainability.

See also the 2023 Snapshot of Danish Financial Institutions which includes an analysis of SFDR reporting by 15 institutions on the social principal adverse impact indicators.