Welcome to July’s edition of the ESG Regulation Monthly Round-Up. Once again, it was a busy month on the SFDR and Taxonomy front following the (i) European Supervisory Authorities' report on voluntary disclosure of principal adverse impacts; (ii) Platform on Sustainable Finance draft report on minimum safeguards; and (iii) publication of the RTS in the official journal. We have set out some of the key points arising from each of these below.

Regulatory Technical Standards (RTS) under SFDR published in Official Journal


On 25 July 2022, the Commission Delegated Regulation (EU) 2022/1288 containing the regulatory technical standards under the SFDR ("RTS") was published in the Official Journal. There have been no material changes from the final draft of the RTS published in April 2022.

This confirms that the RTS will apply to financial market participants (“FMPs”) from 1 January 2023, in addition to the provisions under the SFDR and Taxonomy Regulation which are already in force. FMPs will need to ensure that their pre-contractual and periodic disclosures are in the RTS template form by 1 January 2023, and also ensure that their website disclosures comply with the relevant articles in the RTS. For any FMPs complying with the principal adverse impact (“PAI”) entity level requirements, they will need to ensure that disclosures are made in accordance with the PAI statement contained in Annex I to the RTS by 30 June 2023.

To promote greater clarity on the RTS, the European Supervisory Authorities (“ESAs”) are set to provide practical application Q&As, in addition to the clarification statement released earlier in June 2022.

How did we get here?

To recap, the SFDR mandated the ESAs to develop RTS specifying the content, methodology and presentation for SFDR-related disclosures. The RTS include the prescribed-form templates for reporting principal adverse impacts on sustainability, pre-contractual and periodic disclosures for financial products under Articles 8 and 9 of the SFDR.

In February 2021, the ESAs published draft RTS for disclosures under the SFDR, which were supplemented with additional disclosures under the Taxonomy Regulation in October 2021. Following this, the European Commission ("EC") decided to bundle all RTS into a single instrument ‑ the Delegated Regulation -, which was adopted by the EC on 6 April 2022. This was the final version of the RTS , which were subject to a three-month review period by the European Parliament and Council. The review period culminated with the publication of the final version of the RTS in the Official Journal.

ESAs Joint Committee report on extent of voluntary disclosure of principal adverse impacts under SFDR

On 28 July 2022, the ESAs published a report on the extent of voluntary disclosure of principal adverse impacts under Article 18 of the SFDR (the "Report"). Ultimately, this Report is helpful for any FMPs complying with the PAI disclosure requirements under Article 4 of the SFDR, not just those that have voluntarily opted-in.

Preliminary conclusions

The Report found that:

  • It was difficult to identify definite trends as compliance with voluntary disclosures varies significantly across jurisdictions and FMPs due to the differences in size, nature and scope of activities.

  • Disclosures for FMPs that do not take into account PAIs of investment decisions on sustainability factors are lacking in detail, and FMPs fail to provide clear reasons as to why they do not do so.

  • There have been low levels of disclosure of the degree of alignment with the objectives of the Paris Agreement, with the disclosures being vague.

Further contents of the report

Section 3 of the Report provides good examples of best practices, and less good examples of voluntary disclosures, along with recommendations to the EC and NCAs. Some of the examples of best practices include descriptions of PAIs, credible decarbonisation objectives, and show efforts towards consideration of PAIs while acknowledging the lack of data in certain fields. These examples and recommendations should be considered preliminary, and will be further developed in subsequent reports. Additionally, the ESAs plan to provide further guidance on the implications for due diligence disclosures, along with voluntary disclosures under Article 7(1) SFDR in future reports.

Next steps

As mandated by the EC in a letter dated 28 April 2022, the ESAs have announced that they will consider their findings in their review of the PAIs framework, and that the EC may consider their findings in any preliminary evaluation on the functioning of the SFDR. By way of reminder, the EC has requested that the ESAs submit any amendments to the PAI framework within 12 months following the receipt of the letter, meaning by 28 April 2023.

Draft Report on Minimum Safeguards under Taxonomy Regulation

On 11 July, the Platform on Sustainable Finance (“PSF”) published the Draft Report on Minimum Safeguards, which advises on the application of minimum safeguards ("MS") in relation to the Taxonomy Regulation ("TR"). The Draft Report focusses on four core topics for assessing compliance with the MS – (i) human rights, (ii) bribery and corruption, (iii) taxation, and (iv) fair competition.

It should be noted that the report is only in draft at this stage. The PSF is inviting stakeholder feedback until 6 September 2022 to finalise and submit the report to the EC by later this year. Although the EC is not bound to follow the report's recommendations, it provides welcome clarity for FMPs aiming to comply with the MS.


Article 18 of the TR aims to prevent green investments from being labelled as 'sustainable' when they involve negative impacts on human rights including labour rights, corrupt practices, non-compliance with taxation regulations, or anti-competitive practices. Resultantly, Article 3 of the TR specifies that economic activities must be carried out in compliance with the MS in order to qualify as environmentally sustainable.

SFDR and the Minimum Safeguards

The Draft Report also refers to the SFDR, which is explicitly referenced in Article 18(2) TR, the objective of which is to bring the ‘do no significant harm’ (“DNSH”) disclosures under SFDR in line with the MS requirements in Article 18(1) TR. Accordingly, the Draft Report suggests that FMPs assess alignment with the MS through the use of the five mandatory social PAIs. Of the five PAIs, four topics are already covered in the MS and while the PAI relating to controversial weapons is not covered, the PSF confirm that any such exposure means that an investment cannot be TR-aligned because of its non-compliance with the DNSH principle under the SFDR.

Ultimately, compliance with the MS and the guidance in the Draft Report should therefore achieve compliance with the mandatory social PAIs for the purposes of performing the SFDR’s DNSH test. This is subject to the PSF finalising its recommendations on the MS in the final report.

Key recommendations

The Draft Report recommends assessing the four core topics through a procedural test and an outcome-based test. The former includes having adequate corporate due diligence processes for human rights, and aligning them with the UN Guiding Principles ("UNGPs") and OECD guidelines for Multinational Enterprises. This involves the company reporting on its policies and procedures on the four core topics, and putting in effective policies to act on the identified PAIs.

The outcome test involves considering final court convictions in relation to the four core topics as a sign of non-compliance with the MS. Additionally, the report considers lack of collaboration and non-compliance with National Contact Points, along with non-engagement with the Business and Human Rights Resource Centre with regards to allegations raised against the company.

The procedural considerations that the report recommends for each core topic are:

  • Human rights, including labour rights: Has the company established adequate due diligence processes? This would include taking into account jurisdiction-specific human rights risks, addressing known risks within the relevant sector, and effective company reporting.

  • Bribery and corruption: Has the company developed adequate controls and compliance programmes for preventing and detecting bribery?

  • Taxation: Does the company treat tax governance and compliance as important elements of oversight, and are there adequate tax risk management strategies?

  • Fair competition: Does the company promote employee awareness of the importance of compliance with applicable competition laws? Additionally, does it train senior management in relation to competition issues?

The Draft Report suggests that the status of non-compliance should be upheld until the company can prove, for example through an external audit, that it has implemented an improved process of due diligence that makes future violations unlikely.

Further recommendations and considerations

The Draft Report recognises that there are still gaps that need to be further considered. Further work is required in relation to treating different convictions in various jurisdictions where many human rights violations are not prosecuted or are state-led.