Clarifications on SFDR by the European Commission

Clarifications on SFDR by the European Commission

The European Commission has issued its official responses to the eight questions the European Supervisory Authorities (ESAs) raised regarding the interpretation of the Sustainable Finance Disclosure Regulation (SFDR). (You can read our earlier blog on SFDR and Articles 6,8, and 9 of SFDR here and the Principal Adverse Impacts (PAI) as per SFDR here).

These responses were made public on April 14, 2023. A condensed version of the eight questions and their answers are given below. The link to the detailed and verbatim questions and responses is provided at the end of this article. 

Questions and answers on clarifications on SFDR

#1 Applicability of the definition of “Sustainable Investment” (Art. 2(17))

Question: What is the applicability of the definition of “sustainable investment” under Article 2(17) SFDR to investments in funding instruments, such as general equity or debt of an investee company, that do not specify the use of proceeds?

Response by the European Commission: The definition of sustainable investment in SFDR does not provide a specific approach to determine an investment’s contribution to environmental or social objectives. Financial market participants must disclose their methodology to assess sustainable investments and meet the ‘good governance practices’ requirement. Financial market participants can invest in funding instruments that do not specify the use of proceeds.

#2 Clarifications on “investment in an economic activity that contributes to an environmental objective”

Question: How should “investment in an economic activity that contributes to an environmental objective” or “investment in an economic activity that contributes to a social objective” in Article 2, point (17), SFDR, be interpreted?

Response by the European Commission: To qualify as a ‘sustainable investment’ under Article 2, point (17) SFDR, a financial product must invest in an economic activity that contributes to an environmental or social objective, not significantly harm those objectives, and ensure investee companies follow good governance practices. The SFDR doesn’t specify minimum requirements for these parameters, so financial market participants must carry out their own assessment and disclose their assumptions. Investments considered sustainable must not significantly harm any of the objectives, and simply having a transition plan for the investment is not sufficient.

#3 Question about Article 9 – Carbon emissions reduction objectives in passive and active investment strategies

Question: Can Article 9(3) financial products with a carbon emissions reduction objective have both passive and active investment strategies, and are there any specific requirements for those with an active strategy that uses a designated index as a reference benchmark?

Response by the European Commission: Yes. “Both passive and active investment strategies can fall under Article 9(3) SFDR for financial products aiming to reduce carbon emissions.” The SFDR focuses on transparency and does not mandate the use of Paris-Aligned Benchmarks (PAB) or Climate Transition Benchmarks (CTB), or any specific index. If a PAB/CTB is not used as a benchmark, financial market participants must provide a clear explanation of how they are ensuring the objective of reducing carbon emissions to achieve the long-term goals of the Paris Agreement.

#4 Clarifications on financial products that promote carbon emission reduction

Question: Can a financial product promote carbon emissions reduction as an environmental characteristic under Article 8 SFDR, or should such products always be considered as having carbon emissions reduction as an objective and therefore be required to disclose information under Article 9(3) SFDR?

Response by the European Commission: Article 8 of the SFDR allows financial products to promote any type of characteristics, including carbon emissions reduction, as part of their investment strategy, as long as the product does not have sustainable investment as its objective. However, disclosures about such characteristics should not mislead investors into thinking that the product’s objective is sustainable investment, as required by Article 9(3).

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#5 A Two-part question related to Paris Aligned Benchmark PAB and Climate Transition Benchmark CTB

Question part 1: Can financial products using a passive strategy with a Paris Aligned Benchmark(PAB) or Climate Transition Benchmark(CTB) as a reference benchmark automatically satisfy Article 9(3) SFDR and Article 2(17) SFDR? 

Response by the European Commission on part 1: Article 9(3) of SFDR requires disclosure of information regarding the objective of low carbon emissions exposure in financial products with a carbon emissions reduction objective. If no EU benchmark is available, a detailed explanation must be provided on how the objective of reducing carbon emissions is ensured. Financial products that passively track Paris Aligned Benchmarks(PAB) or Climate Transition Benchmarks(CTB) are not subject to this requirement and are considered to have sustainable investments as their objective.

Question part 2: Can financial products using an active strategy for carbon emissions reduction fulfill the same conditions as EU’s Paris Aligned Benchmarks(PAB) and Climate Transition Benchmarks(CTB)?

Response by the European Commission on part 2: Financial market participants are required to provide an explanation as to why they believe that actively managed financial products with a carbon emissions reduction objective, which do not solely track a Paris Aligned Benchmark(PAB) or Climate Transition Benchmark(CTB), qualify as sustainable investments.

#6 Clarifications on the term “consider” in the context of Principal Adverse Impacts (PAI)

Question: Principal Adverse Impacts(PAI) consideration: What is the meaning of “consider” in Article 7(1), point (a), SFDR? 

Response by the European Commission: SFDR requires financial market participants to disclose how financial products consider principal adverse impacts on sustainability factors. This obligation applies to financial products for which the financial market participant applies Article 4(1), point (a), Article 4(3), or Article 4(4). The disclosure should include both a description of the adverse impacts and the procedures implemented to mitigate those impacts. Recital 18 emphasizes the need for financial market participants to integrate the consideration of principal adverse impacts(PAI) in their processes and include information on their websites.

#7 Clarification on the 500 employees principal adverse impact threshold

Question: 500 employee principal adverse impact (PAI) threshold: For the purposes of Articles 4(3)-4(4) SFDR, how should “the average number of 500 employees” be understood? Furthermore, how can the exemption in Article 23(5) of the Directive 2013/34/EU of the European Parliament and of the Council4 (‘Accounting Directive’) be considered?

Response by the European Commission: SFDR does not define who an employee is, so the definition is governed by national law and hence the financial market participants should refer to the applicable national law to determine who constitutes an employee. The exemption in Article 23 of the Accounting Directive does not affect the disclosure obligations under Article 4(4) SFDR, which must be published and maintained on the website of the financial market participant and are not part of the management report.

#8 Questions about periodic disclosure frequency for portfolio management services

Question: Periodic disclosure frequency for portfolio management services: Does SFDR require financial market participants to provide quarterly or annual periodic reports for portfolio management services?

Response by the European Commission: Only one annual report is required for financial market participants and they should include the periodic disclosures required by Article 25(6) of Directive 2014/65/EU in the fourth quarterly report, based on the periodic report templates of the SFDR Commission Delegated Regulation (EU) 2022/1288.


The responses above can help reduce ambiguities and misinterpretation of the SFDR, enabling financial market participants to effectively comply with the EU regulations. 

Sources and further reading

ESMA – Detailed questions and responses 

NordESG – SFDR, Double Materiality and PAI Indicators

NordESG – EU Sustainable Finance Disclosure Regulation (SFDR)

NordESG – EU Paris-aligned Benchmarks (PABs) and Climate Transition Benchmarks (CTBs)

About NordESG

NordESG is an advisory firm helping corporates develop, articulate and execute their ESG and sustainability strategies. Our work includes sustainability performance reporting support under various ESG frameworks, strategy development or conducting materiality assessments. By doing so, we help businesses meet their disclosure compliance requirements like CSRD but also help them proactively communicate their strategy to other stakeholders like investors, customers and local communities in which they operate. Our work is focused mainly on Europe and North America.

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