On 25 July 2024, the European Banking Authority (EBA), European Securities and Market Authority (ESMA) and the European Insurance and Occupational Pension Authority (EIOPA), jointly known as the European Supervisory Authorities (ESAs), published an update on the consolidated questions and answers (Q&A) on the Sustainable Finance Disclosure Regulation (SFDR) and the SFDR Delegated Regulation (the Q&As).

The updated Q&As clarify several points of confusion with regards to the interpretation of the SFDR, including (i) how to calculate PAI indicators in respect of exposure to companies active in the fossil fuel sector and energy consumption intensity for high impact climate sector and (ii) matters concerning sustainable investment, such as calculating the share which qualifies as environmentally sustainable and measuring sustainable investments at the economic activity and investment level.

We are pleased to see these clarifications and the certainty it brings our clients to have their interpretations confirmed. We set out some of the more interesting updates and additional Q&As below.

• AIFM’s must make Art 10 information available on a website: Section I, FAQ 4 clarifies that registered AIFMs are responsible for making available information required under Art 10 of the SFDR on a website. This may be the financial product’s own website or the website of the group to which the registered AIFM belongs if such website corresponds to the website of the AIFM. If neither is available, then the AIFM must establish a new website to comply with Art 10.

• Exposure to companies active in the fossil fuel sector – how to calculate PAI indicator 4: Section IV, FAQ 26 clarifies that when calculating PAI indicator 4 in Table 1, Annex I of the SFDR Delegated Regulation (Exposure to companies active in the fossil fuel sector):

  • the calculation should be performed on a pass/fail basis (as opposed to a “look-through” basis reflecting a share of fossil fuel activities); and

  • a company is considered to be active in the fossil fuel sector as soon as it derives any revenues from any activities mentioned in the definition contained in the SFDR Delegated Regulation.

• Disclosing energy consumption intensity per high impact climate sector – PAI indicator 6: Section IV, FAQ 27 confirms that Table 1, Annex I of the current SFDR Delegated Regulation, requires separate disclosures for each high impact climate sector.

• Financial market participants should disclose financed emissions from their investments under the same Scope category as their own emissions: Section IV, FAQ 29 confirms that where financial market participants are aggregating adverse impacts of their financial products or their financial products invested in other financial products (eg funds of funds) they should use a “look-through” approach to the investee companies causing the GHG emissions. It does not matter whether an investment is direct or indirect, the financed emissions belonging to each scope of investee companies should be allocated to the same scope as the financial market participant level. For example, investee companies’ Scope 1 and 2 GHG emissions should be allocated under the financial market participant’s Scope 1 and 2 emissions in the PAI indicators.

• Calculating the share of investment that qualifies as environmentally sustainable: Section V, FAQ 20 sets out a detailed worked example to illustrate how the calculations for Taxonomy-alignment should be made, under the pre-contractual template (in Annexes II and III) and the periodic disclosures (Annexes IV and V).

• Measuring sustainable investments at economic activity and at the investment level in practice: Section V, FAQ 21 sets out helpful illustrative examples showing how sustainable investments can be measured at the economic activity level as well as at the investment level. The table in FAQ 21 includes example calculations for three hypothetical products – a climate product (bond focus), an SDG product (bond focus) and a social impact product (equity focus).

• No good governance checks under Article 8 of the SFDR for SPVs whose purpose it is to hold real assets: Section V, FAQ 27 confirms that when a fund invests in assets like cars or real estate through holding companies (such as SPVs) then they are not considered to be “investee companies” for the purpose of the SFDR, and therefore do not need to complete good governance checks.