Sustainable Finance update (asset management) – ESAs publish final report on draft SFDR RTS and ESG fund names guidelines postponed

    1. Final report on SFDR RTS

On 4 December 2023, the European Supervisory Authorities (“ESAs”) published their final report on changes to the SFDR implementing regulation, the so-called regulatory technical standards (the “SFDR RTS”). While certain changes had been mandated by the European Commission, the ESAs took the decision to make a number of other changes in order to address perceived shortcomings of the SFDR RTS currently in force. The main changes are the following:

  • an extension of the social Principal Adverse Impact (“PAIs”) indicators (change mandated by the Commission);
  • other changes to the PAI disclosure framework (change mandated by the Commission); 
  • a new financial product disclosure of greenhouse gas (“GHG”) emissions reduction targets (change mandated by the Commission);
  • improvements and simplifications to the financial product disclosure templates, including a new “dashboard” with a simple summary of key information;
  • enhanced disclosure of how sustainable investments comply with the “do not significantly harm” (“DNSH”) principle;
  • revision of the provisions for products with investment options such as multi-option products;
  • other technical changes including harmonised calculation of sustainable investments and a requirement to produce the disclosures in machine-readable format.

Extension of social PAI indicators

To meet the Commission’s request for more balance between environmental and social indicators, the ESAs are proposing the addition of five mandatory social PAI indicators in table 1 of Annex I of the SFDR RTS, which include indicators such as companies active in the cultivation and production of tobacco, amount of earnings in non-cooperative tax jurisdictions of investee companies (whose revenue exceeded EUR 750 m on the balance sheet for 2 consecutive financial year ends) and gender pay gap.

DNSH – disclosure of thresholds

When taking into account the PAI indicators as part of the DNSH test for determining whether an investment is sustainable, it will be necessary to disclose the thresholds/criteria that were used for those PAI indicators. This is a significant change and it is likely that many financial market participants will now need to develop such thresholds.

GHG emissions reduction targets

This is a new disclosure in the pre-contractual, periodic and website disclosures and will only apply to financial products with GHG emissions reduction targets, such as financial products whose objective is carbon reduction pursuant to Article 9 (3) of SFDR. However, financial products who passively track the EU Climate Transition or Paris-Aligned Benchmarks will be subject to a simplified disclosure. Relatively simple disclosures will be required in the pre-contractual and periodic disclosures, while more detailed disclosures will need to be provided on the website. Information that needs to be disclosed consists of the type of outcome that the financial product is committing to achieve, the level of ambition of the target, the alignment with the goal of limiting global warming to 1.5 degrees Celsius and how the investment strategy will help deliver this goal.

Template simplification

Mainly for the purpose of simplification, the ESAs are proposing a total revamp of the pre-contractual and periodic disclosure templates. Corresponding changes will be made to the website disclosures. The key addition is a supposedly retail-friendly dashboard, which will contain information on whether the financial product promotes E/S characteristics or has a sustainable investment objective. In addition, four key elements will be prominently disclosed: 1. Sustainable investments (and committed minimum percentage), 2. Taxonomy-aligned investments (and committed minimum percentage), 3. PAI consideration and 4. GHG emissions reduction targets. While some of the existing template sections have been retained, the structure of the document has been completed changed and some of the guidance notes modified, which means that transitioning from the existing templates to the new ones is likely to once again result in a significant compliance burden.

Sustainable Investments

Based on Commission guidance in its most recent FAQ, the ESAs have deemed it necessary to require disclosure (in the pre-contractual, periodic and website disclosures) of whether the calculation method for determining the proportion of sustainable investments is either based on the economic activity or the investment level (i.e. pass-fail).


The Commission  has three months to decide whether or not do endorse the draft SFDR RTS. If the Commission endorses the SFDR RTS, the Council and the European Parliament will then have three months to approve or object.

    2. ESMA guidelines on funds’ names

In a statement published on 14 December 2023, ESMA has indicated that it would postpone its guidelines on funds’ names using ESG or sustainability-related terms to ensure that the outcome of the review of the AIFM and UCITS Directives can be fully considered. In particular, ESMA has received two new mandates to develop guidelines specifying the circumstances where the name of an AIF or a UCITS is unclear, unfair, or misleading. ESMA had launched a consultation on the guidelines on 18 November 2022.

In its statement, ESMA announced the following changes to the guidelines compared to the version in the consultation:

  • requirement of a “meaningful” investment in sustainable investments (instead of the previously contemplated 50%-threshold of sustainable investments for fund names with sustainability-related terms);
  • retaining of minimum 80% proportion of investments meeting E/S characteristics or sustainable investment objective;
  • application of Paris-aligned Benchmark exclusions but recognition that these are not appropriate for funds promoting social characteristics or focusing on transition;
  • new category of transition-related terms in respect of which the EU Climate Transition Benchmark exclusions should apply;
  • impact and transition-related terms in fund names will require “measurability”.


ESMA is planning to adopt the guidelines shortly after the date of entry into force of the amended AIFM and UCITS Directives.