The SFDR is an EU regulation that requires financial market participants and financial advisers to have adequate sustainability-related governance structures, processes, and policies in place. It sets disclosure requirements both at the entity and product levels. It introduces mandatory disclosure requirements even for traditional financial products that do not consider sustainability risks and impacts. Most of its Level 1 provisions started to apply on 10 March 2021. The detailed rules for implementation (i.e. Level 2 provisions), which are provided in the form of regulatory technical standards (RTS), are expected to start applying on 1 January 2023. Once the RTS apply, mandatory templates must be used to make entity- and product-level disclosures.

The TR is an EU regulation that establishes a unified classification system for determining which economic activities can be considered environmentally sustainable for the purpose of determining which investments would qualify as sustainable. It supplements the disclosure rules of the Sustainable Finance Disclosure Regulation (SFDR) as well as the rules in the Non-Financial Reporting Directive ((NFRD), future Corporate Sustainability Reporting Directive (CSRD)). Entities that are subject to the SFDR and/or NFRD must disclose information on the taxonomy-aligned portion of their investments and/or economic activities. The TR’s provisions that address climate change mitigation and climate change adaptation objectives have applied since 1 January 2022. However, the provisions related to other environmental objectives will begin to apply on 1 January 2023.

MiFID II and its delegated acts were amended to integrate sustainability considerations into product governance, organisational requirements, and operating conditions. Investment firms providing financial advice or portfolio management are required, amongst other things, to carry out a mandatory analysis of their clients’ sustainability preferences and to consider these preferences in suitability assessments and reporting. Sustainability risks are to be integrated into risk management policies, and sustainability preferences are to be taken into account when assessing conflict-of-interest. The amendments require sustainability factors to also be considered in product governance processes, including target market identification. While the suitability amendments start applying on 2 August 2022, the product governance requirements apply from 22 November 2022.

Principal adverse impact (PAI) is a key concept in the Sustainable Finance Disclosure Regulation (SFDR). PAIs should be understood as the material, or likely to be material, impacts of investment decisions and advice that result in negative effects on sustainability factors. The SFDR requires PAI reporting both at the entity and product levels on a comply-or-explain basis. However, entity-level PAI reporting is obligatory for large financial market participants (FMPs) (i.e. > 500 employees). For their entity-level PAI reporting, FMPs are expected to use the mandatory reporting template included in Annex 1 of the SFDR’s Regulatory Technical Standards (RTS). The use of the template will become mandatory once the RTS starts applying on 1 January 2023. The first entity-level PAI statement using the mandatory template must be published by 30 June 2023 with a reference period from 1 January 2022 to 31 December 2022.