The European Commission has published its answers to the ESAs’ recent questions on the Sustainable Finance Disclosures Regulation (SFDR) and the Taxonomy Regulation. The topics covered include:

  • Principal adverse impact (PAI) disclosures and whether a financial market participant is able to not consider PAI at entity level but still consider PAI under Article 7 of the SFDR for some of the financial products it manages.
  • Financial advisers and recommendations of financial products.
  • The transparency of the integration of sustainability risks and rules for financial products that are no longer made available.
  • Good governance practices, including financial products investing solely in government bonds.
  • The scope of Articles 5 and 6 of the Taxonomy Regulation.

Financial market participants have been pondering the first topic for some time and the Commission has provided some clarity saying that a financial market participant that does not consider adverse impacts of investment decisions on sustainability factors at entity level, may manufacture a financial product for which PAI disclosures must be made.

Financial market participants must, where relevant, include the information referred to in Article 4(1)(b) of the SFDR (setting out clear reasons as to whether and when they intend to consider such adverse impacts at entity level). A financial product pursuing a reduction of negative externalities caused by the investments underlying that product must not be part of such entity level information.