Enhancing Sustainability Disclosures

1. ESG Services WHITEPAPER Enhancing Sustainability Disclosures Proposed Amendments to SFDR Delegated Regulation by European Supervisory Authorities

2. Enhancing Sustainability Disclosures: Proposed Amendments to SFDR Delegated Regulation by European Supervisory Authorities Key Highlights: • Enhanced and extended set of social indicators for disclosing the principal adverse impacts (PAIs) of investment choices. • Improvements to the content of various indicators for adverse consequences, as well as their respective definitions, methodology, measurements, and presentation. • Product declarations on decarbonization (reduction of greenhouse gas (GHG) emissions) goals, level of ambition, and how to attain the target. • European Supervisory Authorities (ESAs) suggested new iterations of the pre-contractual and periodic disclosure templates (Annexes 2 to 5 of the RTS). • Comments on the consultation paper by July 4th, 2023. • ESAs have agreed to submit the mandate’s Final Report by the end of October 2023 to the European Commission after considering all the comments that were submitted, conducting a joint public hearing, and performing focused consumer testing. Regulatory Technical Standards (RTS) for Sustainability Disclosures under SFDR After being delayed twice, the Sustainable Finance Disclosure Regulation (SFDR) Level 2 regulations ultimately took effect on January 1st, 2023. The SFDR RTS,which offers disclosure templates for financial products relevant to sustainability, will serve as their format. Additional technical information on entity- level requirements and other in-scope items is also included in the RTS. The RTS’s goal is sufficiently apparent. Investors will have better access to information on sustainability claims made about the products by financial market players. This makes comparing one product with others’ offerings simpler. If necessary, the templates will also demonstrate how these funds correspond with the EU Taxonomy, specifying which -friendly actions qualify. The most significant change is that funds will now be required, as of January 1st, to publish specific sustainability-related information at the product level. There are three pertinent product categories to consider: Figure 1 SFDR product classifications Products under Article 6 Funds that don’t follow sustainable practices Products under Article 8 “Light green” funds that promote social and/or environmental values Products under Article 9 ”Dark Green” items are vetted as possible investments depending on how well they contribute to the fund’s sustainable investing objective. This information is not totally new. In March 2021, SFDR Level 1 criteria were imposed. The initial legislation established specifications for in-scope funds and entities, but the RTS has added more details about the information’s substance, methodology, and presentation. Product-level information must follow the rigid RTS guidelines starting January 2023. 2

3. Enhancing Sustainability Disclosures: Proposed Amendments to SFDR Delegated Regulation by European Supervisory Authorities Proposed Amendments to the SFDR Delegated Regulation by the ESAs Figure 2 European Supervisory Authorities In response to their shared responsibility to evaluate and update the RTS augmenting SFDR, the European Supervisory Authorities (EBA, collectively the ESAs) released a joint consultation document on April 12th, 2023. Based on their initial mission, the ESAs have suggested alterations, including disclosing objectives, expanding the list of social indicators for PAIs, and improving several additional indicators for harmful effects. The ESAs have also proposed additional revisions to the RTS, including enhancements to the “do no significant harm” standard (per recommendations made by the European Commission) and adjustments to the pre- contractual and periodic disclosure templates. Let’s discuss these points briefly now. EIOPA, and ESMA, decarbonization Expanding the List of Social Indicators for Principal Adverse Impacts The SAs are exploring ways to expand and improve the list of social indicators, including ones relevant from both EU and international perspectives, such as tax avoidance. They are using the first set of draft European Sustainability Reporting Standards (ESRS) as a basis for defining new social indicators, which will be less burdensome for companies to disclose as mandated by the Corporate Sustainability Reporting Directive (CSRD). However, the ESAs are also considering suggesting additional mandatory and opt-in indicators not included in the ESRS. They are also looking to introduce social indicators applicable to investments in real-estate assets. 3

4. Enhancing Sustainability Disclosures: Proposed Amendments to SFDR Delegated Regulation by European Supervisory Authorities Table 1 List of New Social Indicators and their rationale New Mandatory Indicator Description Rationale Amount of accumulated earnings by undertakings where the consolidated revenue on their balance sheet date exceeded for each of the last two consecutive financial years a total of €750 million at the end of the relevant financial year in jurisdictions that appear on the revised EU list of noncooperative jurisdictions for tax purposes Addition of an indicator to assess the company’s profit in noncooperative jurisdictions for tax purposes according to Article 48(b) and (c) of Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 Amount of accumulated earnings in noncooperative tax jurisdictions Additional indicator to align with Commission Delegated Regulation (EU) 2020/1818 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards minimum standards for EU Climate transition Benchmarks and EU Paris-aligned Benchmarks, Article 12 (1)(b) - Exclusions for EU Paris-aligned Benchmarks Exposure to companies involved in the cultivation and production of tobacco Share of investments in investee companies involved in the cultivation and production of tobacco Share of investments in investee companies without commitments on its non- interference in the formation of trade unions or election of workers’ representatives Addition of indicator to assess the adverse impact of companies preventing the formation of trade unions or election of worker representative Interference in the formation of trade unions or election of worker representatives Addition of indicator to assess the adverse impact of companies employing a high percentage of employees earning less than the adequate wage Share of employees earning less than the adequate wage Average percentage of employees in investing companies earning less than the adequate wage New Opt-in Indicator Description Rationale Excessive use of nonguaranteed-hour employees in investee companies Addition of an indicator to assess the adverse impact of a company’s excessive use of nonguaranteed-hour employees Average share of nonguaranteed-hour employees as share of total employees Addition of an indicator to assess the adverse impact of a company’s excessive use of temporary contract employees Excessive use of temporary contract employees in investee companies Average share of own employees with a temporary contract as share of total employees Addition of an indicator to assess the adverse impact of a company’s excessive use of workers on temporary contracts Excessive use of nonemployee workers in investee companies Average share of nonemployee workers as share of total employees Insufficient employment of persons with disabilities within the workforce Average share of persons with disabilities amongst the workforce of investee companies Addition of an indicator to assess the company’s employment of people with disabilities Lack of grievance/ complaints handling mechanism for communities affected by the operations of the investee companies Share of investments in investee companies without grievance complaints handling mechanism for stakeholders materially affected by the operations of the investee companies Addition of an indicator to assess the lack of grievance/complaints handling mechanism for communities affected by the operations of the investee companies Lack of grievance/ complaints handling mechanism for consumers/ end-users of the investee company Share of investments in investee companies without grievance/ complaints handling mechanism for consumers or end users of the investee companies Addition of an indicator to assess the lack of grievance/ complaints handling mechanism for consumers end-users of the investee company 4

5. Enhancing Sustainability Disclosures: Proposed Amendments to SFDR Delegated Regulation by European Supervisory Authorities Refining Adverse Impact Indicators: Definitions, Methodologies, Metrics, and Presentation The ESAs have proposed changing PAI indicators #10 and #11 to refer to the UN Guiding Principles and the Declaration of the International Labour Organization on Fundamental Principles and Rights at Work instead of the UN Global Compact Principles to maintain consistency all over sustainable finance legislation, including for purposes of alignment with the Taxonomy Regulation. Additionally, they are proposing a new indicator measuring the adverse impact of exposure to companies involved in the cultivation and production of tobacco. Finally, the ESAs are seeking feedback on the effects of the definition of “enterprise value” in the SFDR Delegated Regulation on the meaning of “current value of investment” for the practicality of the provisions related to the calculation of the PAI. Table 2 New Revision of the Old PAI Indicators Old PAI Name New Revision to Name and Definition Violations of UN Global Compact principles and Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises Violations of OECD Guidelines for Multinational Enterprises or the UN Guiding Principles including the principles and rights set out in the eight fundamental conventions identified in the ILO Declaration and the International Bill of Human Rights Lack of processes and compliance mechanisms to monitor compliance with OECD Guidelines for Multinational Enterprises or the UN Guiding principles including the principles and rights set out in the eight fundamental conventions identified in the ILO Declaration and the International Bill of Human Rights Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines for Multinational Enterprises Total hazardous waste Hazardous waste and radioactive waste ratio Unadjusted gender pay gap Gender pays gap between female and male employees Board gender diversity Management and supervisory board gender diversity Investments in companies producing pesticides and other agrochemical products Investments in companies producing chemicals Investments in companies without workplace accident prevention policies Investments in companies without workplace accident prevention policies or management systems Rate of accidents Rate of recordable work-related injuries Number of days lost to injuries, accidents, fatalities, or illness Number of days lost to work-related injuries, accidents, ill health. and fatalities Lack of grievance/complaints handling mechanism related to employee matters Lack of grievance/complaints handling mechanism to report alleged cases of discrimination related to employee matters Incidents of discrimination and incidents of discrimination related to any type of discrimination leading to monetary and non-monetary sanctions in investee companies Incidents of discrimination Operations and suppliers at significant risk of incidents of child labor Operations and suppliers using workforce qualifying as child labor Operations and suppliers at significant risk of incidents of forced or compulsory labor Operations and suppliers at significant risk of forced or compulsory labor 5

6. Enhancing Sustainability Disclosures: Proposed Amendments to SFDR Delegated Regulation by European Supervisory Authorities The current definition of ‘inefficient real estate assets’ in PAI indicator 22 of Table 1 in Annex I of the SFDR Delegated Regulation distinguishes between assets built before and after December 31st, 2020. To improve the coherence between SFDR and the EU Taxonomy technical screening criteria and facilitate the implementation of this indicator, the ESAs are questioning whether it would be appropriate to broaden the definition of inefficient real-estate assets built prior to December 31st, 2020, and align it with the EU Taxonomy criteria for climate change mitigation DNSH under section 7.7 of Annex II of the Commission Delegated Regulation (EU) 2021/2139. If such a reform were to take effect, a building constructed before December 31st, 2020 would be considered an “inefficient real estate asset” if it satisfied the two cumulative requirements: a. The structure’s Energy Performance Certificate (EPC) is below a C b. The building is not in the top 30% of the national or regional building stock, as determined by sufficient evidence and operational primary energy demand (PED). Fund Disclosures Even though the deadline for asset managers with sustainable investment products to start disclosing under the SFDR was January 2023, there is still significant ambiguity around some critical reporting criteria, such as the PAI requirements. Asset manager Amundi, for instance, recently downgraded nearly all of its $45 billion in Article 9 funds, claiming that “the current regulatory framework is still unable to enable the financial industry to respond uniformly as to what should be considered ‘sustainable’ or not.” Revised Targets for Reducing Greenhouse Gas Emissions Figure 3 Reducing Greenhouse Gas Emissions  Carbon Emissions Reducing To simplify the existing regulations, the ESAs have suggested seeking input from stakeholders on revising the format, organization, and wording of the template used in the regulation. They have also created a dashboard that provides essential information for pre-contractual and periodic disclosures, such as whether the investment product promotes sustainability characteristics or has a sustainable investment objective, as well as minimum levels of sustainable and taxonomy-aligned investments and targets for reducing GHG emissions and achieving PAI. The ESAs recognize the importance of providing detailed disclosures to investors while ensuring that the information is comprehensible for retail investors. The disclosures should substantiate GHG emission reduction targets and prevent greenwashing while being feasible and proportional for FMPs. 6

7. Enhancing Sustainability Disclosures: Proposed Amendments to SFDR Delegated Regulation by European Supervisory Authorities To meet these requirements, the ESAs propose simplified disclosures in pre-contractual documents, such as the type of outcome the product commits to achieve, the level of ambition of the target(s), and the share of investments the target covers. The disclosures should also explain how the investment strategy contributes to achieving the target(s). In periodic reports, additional simplified disclosures should provide information on progress to date and identify potential delays in reaching the target(s) and any necessary adjustments. Detailed disclosures on the website will complement pre-contractual and periodic disclosures. The pre- contractual documents and periodic reports should include cross-references to the website. FMPs will be required to offer a narrative explanation of how the target would be met, showing if the goal for reducing GHG emissions is: a. A pledge to reduce product 20’s financed GHG emissions by selling investments with specific GHG emission levels and reallocating funds to businesses with comparably lower emissions, by excluding relatively higher-emitting assets from the portfolio. This strategy would reduce financed emissions even if no emission reductions have been made in the real economy simultaneously; and/or b. An assurance that the investments would be made in investee firms that reduce GHG emissions during the investment, either • By investing in businesses that promise to reduce GHG emissions throughout (doing a thorough ex-ante examination of the businesses’ possible transition plans to determine their capacity to deliver GHG emission reductions over time); or • Through interacting with investee firms to help them reduce their GHG emissions (reduction through active ownership and maximizing the impact of stewardship and engagement). the investment DNSH Disclosure Design Options To offset the wide discretion that FMPs have in evaluating and disclosing the requirements for ”sustainable investments” under SFDR, the ESAs have proposed changes to the SFDR itself (Level 1). The existing standard for passing the DNSH test is inconsistently applied, which jeopardizes financial product comparability and may result in greenwashing, according to the ESAs. The ESAs also drew attention to challenges brought on by the interrelationship between environmental PAI indicators and the DNSH criteria about “environmentally sustainable” activities as defined by the EU Taxonomy Regulation 2020/852. Following are some suggestions made by the ESAs for this review: • Make no changes, owing to the newness of the disclosure system and the fact that a new thorough evaluation of SFDR was already scheduled for January 2023; • Introduce quantifiable thresholds for PAI indicators inside the DNSH test to more accurately identify whether a sustainable investment does not materially impair environmental or social goals; • Introduce an optional “safe harbor for environmental DNSH” that will exempt investments from passing a second DNSH test concerning environmental goals under the SFDR if they already meet the criteria for being considered “environmentally sustainable” under Article 3 of the Taxonomy Regulation. Regarding this choice, the ESAs have suggested adding a uniform statement to the product disclosures stating that some economic activities that adhere to the Taxonomy Regulation do not necessitate further environmental DNSH declarations. Next Steps On July 4th, 2023, the period for consultation comes to an end. By April 28th, 2023 (one year after they received the Commission’s letter), the ESAs had to submit recommended amendments per the Commission’s mandate. However, the ESAs informed the Commission in a letter dated October 26th, 2022 that ”significant challenges” would cause a delay of at least six months (i.e., until at least October 28th, 2023) before they could produce the draft RTS. These will be sent to the Commission as the final report. After that, the draft RTS would be anticipated to receive the Commission’s approval and adoption. The European Parliament and the EU Council would review the accepted legislative proposal before it gets published in the Official Journal. Although it is difficult to predict how quickly the process might proceed, it might be reasonable to anticipate that the final Delegated Regulation will be published in the OJ in Q4 2023 (possibly in Q1 2024). 7

8. Enhancing Sustainability Disclosures: Proposed Amendments to SFDR Delegated Regulation by European Supervisory Authorities About the Author JAYAPRAKASH MALLIKARJUNA • Senior Vice President - ESG Services & Data Modernization Passion for generating actionable insights from data is something that drives Jayaprakash. In his 20+ years of professional journey, his focus has been to enhance customer experience and drive value for businesses. At SGA, he plays a key role in enabling the growth of ESG and Data modernization businesses. Prior to SGA, he spent over a decade at Thomson Reuters in the investment research space and then jumped into the start-up world with a mandate to drive operations strategies and grow the business. Being an ardent chess player and a runner help him in strategizing paths to the end-goals consistently while his puns keep him high. Contributors SAURAV BHANDARI • Vice President - Client Services Over 17 years of experience in the areas of Operations, Transition, Transactional Quality, Training, PnL, Business Transformation and Project Management. PRINCE2, Six Sigma GB & BB, AINS (Associate in US General Insurance) credential holder with a diploma in General Management from the ICFAI and a MBA in Supply Chain Management from Welingkar Institute of Management VIJAY SUVARNA • Senior Manager, ESG Solutioning Over 12 years of experience  in ESG, sustainability, project management,  data analysis,  and responsible supply chain. CQI/IRCA certified ISO 14001, ISO 45001 lead auditor. Holds a Master’s degree in Actuarial Science (Mathematics), Bachelor’s in Risk Management & MIS from Temple University, Philadelphia. ABHILASHA SUKUMARBABU • Project Manager, ESG Research With over 11 years of experience in conducting ESG and sustainability research for the financial services industry, Abhilasha has expertise in leading client management and deliveries, data management, people management and training on various ESG-related aspects. She has closely supported clients on SFDR, EU Taxonomy, SDG impact assessments and social focused engagements. Abhilasha has handled teams working on diverse ESG research projects, contributed to ESG whitepapers and developed ESG surveys and templates for various reporting frameworks. Disclaimer This document makes descriptive reference to trademarks that may be owned by others. The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or get commercially benefited from it or imply the existence of an association between SGA and the lawful owners of such trademarks. Information regarding third-party products, services, and organizations was obtained from publicly available sources, and SGA cannot confirm the accuracy or reliability of such sources or information. Its inclusion does not imply an endorsement by or of any third party. Copyright © 2023 SG Analytics Pvt. Ltd. www.sganalytics.com GET IN TOUCH Pune | Hyderabad | Bengaluru | London | Zurich | New York | San Francisco | Toronto | Amsterdam 8