Questions

Q1 : Do you agree with the newly proposed mandatory social indicators in Annex I, Table I (amount of accumulated earnings in non-cooperative tax jurisdictions for undertakings whose turnover exceeds € 750 million, exposure to companies involved in the cultivation and production of tobacco, interference with the formation of trade unions or election worker representatives, share of employees earning less than the adequate wage)?

The Asset Management Group (AMG) of SIFMA disagree with the additional mandatory social indicators for a number of reasons.

First, there is a significant data challenge that is the result of the lack of a consistent and aligned approach between the various EU sustainable finance disclosure rules, specifically between the SFDR and the Corporate Sustainability Reporting Directive (CSRD). Prior to the introduction of CSRD, there is no general obligation on investee companies to report on the indicators that financial market participants (FMPs) are required to report under SFDR. While in theory the CSRD and European Sustainabiltiy Reporting standards (ESRS) should lead to certain EU and international undertakings reporting on more of the data required by asset managers under SFDR, this is not likely to be possible in practice because the proposed new indicators are not currently proposed to be required to be mandatorily reported under the CSRD, so asset managers are unlikely to be able to consistently obtain this data in future. Notably, based on the latest consultation on the first set of the draft ESRS, the European Commission has suggested that companies are able to decide what to report on under the draft ESRS based on materiality, so certain data may not be available even for companies in scope of the CSRD, if they decide this is not material. We would therefore caution against adding additional indicators for which data availability and quality are likely to be low, particularly where these indicators are not required to be reported on a mandatory basis under the CSRD.

We believe it would be more appropriate to allow more time for the current indicators in Annex I to become established and widely published by investee companies before adding new indicators. Furthermore, we note that as at the time of our submission, the first entity level reports on these indicators under Article 4 of SFDR have only recently been published. Time should be taken to review these reports and consider industry wide issues in the reporting that may have emerged before proposing changes to the indicators. There are efforts by investee companies to build reporting frameworks to provide data on PAI indicators, so the addition of further mandatory indicators will erode the efforts of these investee companies.

Second, even when the CSRD is fully implemented, there will be many small EU undertakings and international undertakings that are out of scope of CSRD. Asset managers invest in shares and bonds of companies all around the world, which means that the required data will continue to not be subject to related mandatory reporting obligations for a large proportion of global and non-EU regionally-focused portfolios. There will therefore still be a significant data gap with respect to many companies, one which mandatory reporting under the CSRD will not resolve (given these companies fall outside the scope of the CSRD). Adding further indicators to reporting at this stage (before time has been given for current reporting to become established), would exacerbate this issue and result in low quality of data and reporting by financial market participants (FMPs).

Third, not all the proposed mandatory social indicators must be reported under the ESRS (e.g. amount of accumulated earnings in non-cooperative tax jurisdictions). This data may therefore not be available even for companies in scope for CSRD reporting. Asset managers will face significant challenges in collecting this data, since reporting is not mandatory.

Overall, whilst SIFMA AMG appreciate that in some cases regulation must provide the impetus to increase the availability of data, rather than regulation merely requiring disclosure of data that is already available, the current indicators in Annex I of the SFDR Delegated Regulation are already ambitious, and hence more time should be allowed for data availability to increase before additional indicators are added. Otherwise, reporting risks being misleading and arbitrary, given a lack of data may distort disclosures or limit their usefulness for investors.

Q2 : Would you recommend any other mandatory social indicator or adjust any of the ones proposed?

As with the response for Question 1, SIFMA AMG do not think any mandatory social indicators should be added.